UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

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

~~(Mark One)~~ For the Quarter ended September 30, 2005 OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

ý		~~QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~

~~For the Quarter ended June 30, 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) 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

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

As of ~~August 1,~~November 5, 2005 there were ~~34,320,137~~34,428,665 shares of the Registrant’s Common Stock issued and outstanding.

BROADVISION, INC. AND SUBSIDIARIES

FORM 10-Q

Quarter Ended ~~June~~September 30, 2005

TABLE OF CONTENTS

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

PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings
Item 2.	~~Changes in~~Unregistered Sales of Equity 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)

	June 30, 2005			December 31, 2004			September 30, 2005			December 31, 2004
	(unaudited)						(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	26,839		$	41,851		$	6,066		$	41,851
Accounts receivable, less receivable reserves of $1,308 as of June 30, 2005 and $1,409 as of December 31, 2004	12,815			14,370
Accounts receivable, less receivable reserves of $1,090 as of September 30, 2005 and $1,409 as of December 31, 2004							10,576			14,370
Restricted cash, current portion	1,912			21,933			—			21,933
Prepaids and other	2,167			2,232			1,879			2,232
Total current assets	43,733			80,386			18,521			80,386

Property and equipment, net	2,940			3,566			2,612			3,566
Restricted cash, net of current portion	1,997			2,323			1,997			2,323
Equity investments	—			574			—			574
Goodwill	56,434			56,434			43,236			56,434
Other assets	1,279			1,370			1,077			1,370

Total assets	$	106,383		$	144,653		$	67,443		$	144,653

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Bank borrowings and current portion of long-term debt	$	27,927		$	25,566		$	11,768		$	25,566
Accounts payable	5,461			7,470			4,561			7,470
Accrued expenses	15,793			40,745			16,168			40,745
Warrant liability	1,386			4,899			687			4,899
Unearned revenue	3,705			3,870			3,043			3,870
Deferred maintenance	13,995			15,972			12,454			15,972
Total current liabilities	68,267			98,522			48,681			98,522

Long-term debt, net of current portion	162			7,443			—			7,443
Other non-current liabilities	6,995			8,278			2,282			8,278

Total liabilities	75,424			114,243			50,963			114,243

Commitments and contingencies (Note 4)

Stockholders’ equity:
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; 34,320 shares issued and outstanding as of June 30, 2005 and 33,951 shares issued and outstanding as of December 31, 2004	3			3
Common stock, $0.0001 par value; 2,000,000 shares authorized; 34,429 shares issued and outstanding as of September 30, 2005 and 33,951 shares issued and outstanding as of December 31, 2004							3			3
Additional paid-in capital	1,215,141			1,214,619			1,215,217			1,214,619
Accumulated other comprehensive loss	(149		)	(172		)
Accumulated other comprehensive income (loss)							(168		)	(172		)
Accumulated deficit	(1,184,036		)	(1,184,040		)	(1,198,572		)	(1,184,040		)
Total stockholders’ equity	30,959			30,410			16,480			30,410

Total liabilities and stockholders’ equity	$	106,383		$	144,653		$	67,443		$	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 June 30,						Six Months Ended June 30,
	2005			2004			2005			2004			Three Months Ended September 30,						Nine Months Ended September 30,
													2005			2004			2005			2004
Revenues:
Software licenses	$	3,391		$	7,097		$	7,807		$	14,937		$	3,134		$	4,654		$	10,941		$	19,591
Services	12,123			13,031			24,074			26,080			10,943			12,570			35,017			38,650
Total revenues	15,514			20,128			31,881			41,017			14,077			17,224			45,958			58,241

Cost of revenues:

Cost of software licenses	(186		)	313			(243		)	891			106			256			(137		)	1,147
Cost of services	5,614			6,302			11,594			12,579			5,641			6,391			17,235			18,970

Total cost of revenues	5,428			6,615			11,351			13,470			5,747			6,647			17,098			20,117

Gross profit	10,086			13,513			20,530			27,547			8,330			10,577			28,860			38,124

Operating expenses:
Research and development	3,955			4,509			8,242			9,397			3,095			4,600			11,337			13,997
Sales and marketing	5,060			7,480			10,871			14,346			2,948			6,020			13,819			20,365
General and administrative	2,829			2,400			5,364			4,817			2,162			2,335			7,526			7,152
Restructuring charge	309			679			(395		)	1,249
Total operating expenses	12,153			15,068			24,082			29,809
Business combination costs													977			—			977			—
Restructuring charge (credit)													245			(25,454		)	(150		)	(24,205		)
Goodwill impairment													13,198			—			13,198			—
Total operating expenses (benefit)													22,625			(12,499		)	46,707			17,309

Operating loss	(2,067		)	(1,555		)	(3,552		)	(2,262		)
Operating income (loss)													(14,295		)	23,076			(17,847		)	20,815

Interest (expense) income, net	(1,090		)	102			(1,834		)	211			(1,002		)	77			(2,836		)	288
Other (expense) income, net	313			(45		)	3,428			(178		)
Other income, net													220			238			3,648			59

Loss before provision for income taxes	(2,844		)	(1,498		)	(1,958		)	(2,229		)
Income (loss) before provision for income taxes													(15,077		)	23,391			(17,035		)	21,162

Benefit (provision) for income taxes	(70		)	6			1,962			(130		)	540			(11		)	2,503			(141		)

Net income (loss)	$	(2,914	)	$	(1,492	)	$	4		$	(2,359	)	$	(14,537	)	$	23,380		$	(14,532	)	$	21,021

Basic income (loss) per share	$	(0.09	)	$	(0.04	)	$	0.00		$	(0.07	)	$	(0.42	)	$	0.70		$	(0.43	)	$	0.63
Diluted income (loss) per share	$	(0.09	)	$	(0.04	)	$	0.00		$	(0.07	)	$	(0.42	)	$	0.69		$	(0.43	)	$	0.61
Shares used in computing:
Basic income (loss) per share	34,181			33,476			34,077			33,392			34,320			33,599			34,159			33,459
Diluted income (loss) per share	34,181			33,476			34,163			33,392			34,320			34,052			34,159			34,322

Comprehensive income (loss):
Net income (loss)	$	(2,914	)	$	(1,492	)	$	4		$	(2,359	)	$	(14,537	)	$	23,380		$	(14,532	)	$	21,021
Other comprehensive gain (loss), net of tax:
Unrealized investment gains less reclassification adjustment for gains included in net income (loss)	—			49			—			49			—			188			—			238
Foreign currency translation adjustment	(22		)	—			23			—			(19		)	—			4			—
Total comprehensive income (loss)	$	(2,936	)	$	(1,443	)	$	27		$	(2,310	)	$	(14,556	)	$	23,568		$	(14,528	)	$	21,259

See Accompanying Notes to Condensed Consolidated Financial Statements

BROADVISION, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands; unaudited)

	Six Months Ended June 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
Cash flows from operating activities:
Net income (loss)	$	4		$	(2,359	)	$	(14,532	)	$	21,021
Adjustments to reconcile net income (loss) to net cash used for operating activities:
Depreciation and amortization	638			2,309			973			3,129
Stock-based compensation credit	—			(15		)	—			(15		)
Release of doubtful accounts and reserves	(101		)	(562		)	(319		)	(1,722		)
Amortization of prepaid royalties	—			355			54			494
Unrealized loss on investments	—			(50		)	—			50
(Gain) loss on cost method investments	(1,117		)	284			(1,117		)	517
Loss (gain) on sale or abandonment of fixed assets	66			(96		)	78			(96		)
Non-cash restructuring charge (reversal)							—			(24,855		)
Release of income tax accrual	(2,032		)	—			(2,032		)	—
Gain on revaluation of warrants	(3,513		)	—
(Gain) loss on revaluation of warrants							(4,212		)	272
Amortization of discount on convertible notes	1,556			—			2,382			—
Amortization of goodwill							13,198			—
Changes in operating assets and liabilities:
Accounts receivable	1,656			3,421			4,113			5,002
Prepaids and other	306			775			299			754
Other non-current assets	91			387			293			735
Accounts payable and accrued expenses	(3,420		)	(3,068		)	(5,220		)	1,128
Restructuring accrual	(22,152		)	—			(24,215		)	(38,969		)
Unearned revenue and deferred maintenance	(2,142		)	(2,632		)	(4,345		)	(6,105		)
Other noncurrent liabilities	4			(8,540		)	(80		)	(184		)
Net cash used for operating activities	(30,156		)	(9,791		)	(34,682		)	(38,844		)

Cash flows from investing activities:
Purchase of property and equipment	(108		)	(318		)	(132		)	(489		)
Transfer from restricted cash	19,702			(2,432		)
Transfer from (to) restricted cash							20,324			(1,132		)
Purchase of long-term investments	—			(100		)	—			(100		)
Proceeds from sale of cost method investments	350			—			590			574
Proceeds from dividends	1,101			—			1,101			277
Net cash (used in) provided by investing activities	21,045			(2,850		)	21,883			(870		)

Cash flows from financing activities:
Proceeds from bank line of credit	35,000			76
Proceeds from bank line of credit, term debt, and convertible notes							35,000			69,076
Repayments of bank line of credit, term debt, and convertible notes	(41,476		)	(492		)	(58,623		)	(81,744		)
Proceeds from issuance of common stock, net	522			1,185			598			1,561
Net cash (used in) provided by financing activities	(5,954		)	769			(23,025		)	(11,107		)

Effect of exchange rates on cash and cash equivalents	53			—			39			189

Net decrease in cash and cash equivalents	(15,012		)	(11,872		)	(35,785		)	(50,632		)
Cash and cash equivalents at beginning of period	41,851			78,776			41,851			78,776
Cash and cash equivalents at end of period	$	26,839		$	66,904		$	6,066		$	28,144

Supplemental disclosures of cash flow information:
Cash paid for interest	$	415		$	52		$	663		$	87
Cash paid (refunds received) for income taxes	$	(259	)	$	194		$	(547	)	$	227

See Accompanying Notes to Condensed Consolidated Financial Statements

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 in May 1993 and has been a publicly traded corporation since 1996. BroadVision solutions help customers rapidly increase revenues and reduce 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.

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

~~Recent Developments~~Merger Agreement

In July 2005, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Bravo Holdco (“Bravo Holdco”), an exempted company with limited liability incorporated under the laws of the Cayman Islands and wholly owned subsidiary of Vector Capital Corporation (“Vector”), and Bravo Merger Sub, LLC, a newly formed Delaware limited liability company and wholly owned subsidiary of Bravo Holdco (“Merger Sub”), pursuant to which, subject to satisfaction or waiver of the conditions therein, it is intended that the Company will merge with and into Merger Sub, and the Company’s separate corporate existence will thereupon cease. Under the terms of the Merger Agreement, the holders of shares of the Company’s common stock (other than stockholders who exercise appraisal rights under Delaware law) that are outstanding immediately prior to the consummation of the Merger will receive $0.84 in cash for each share of common stock at the time of the consummation of the Merger (the “Effective Time”).

The consummation of the Merger is conditioned upon, among other things, the adoption of the Merger Agreement by the holders of a majority of the outstanding shares of the Company’s common stock and other closing conditions. A proxy card and proxy statement describing the terms of the Merger Agreement were mailed in September 2005 to stockholders of record as of September 16, 2005. Such materials included the board of directors’ recommendation FOR the approval of the Merger Agreement. As of November 11, 2005, approximately 13.0 million shares had been voted in favor of the transaction, which is over 92% of the total shares voted but less than the nearly 17.2 million shares required to achieve a quorum to hold the meeting and approve the transaction. On November 11, 2005, in order to extend the period during which stockholders may submit proxies, the Company adjourned its special stockholder meeting until December 21, 2005. Previously, the Company had adjourned its special stockholder meeting from October 12, 2005 successively to October 26, 2005, November 4, 2005 and November 11, 2005.

There can be no assurance that a sufficient number of stockholder votes will be received in the time periods required under the Merger Agreement in order to approve the transaction or that the transaction otherwise will be completed. On November 3, 2005, Vector and Bravo Holdco filed a second amended statement to their Schedule 13D filed with the Securities and Exchange Commission (the “SEC”) on August 4, 2005, in which Bravo Holdco stated its belief that 1) certain conditions to the closing of the Merger would not and cannot be satisfied, 2) Bravo Holdco has the right to terminate the Merger Agreement, 3) Bravo Holdco would have no obligation under the Merger Agreement to proceed with the Merger even if the Merger is approved by the Company’s stockholders and 4) Bravo Holdco does not intend as of the date of such filing to waive any of the conditions to the closing of the Merger. The Company disagrees that any conditions to closing would not and cannot be satisfied, and believes that the parties to the Merger Agreement would be obligated to complete the Merger if it is approved by the Company’s stockholders. Following the October 12, 2005 special stockholder meeting at which a quorum was not present, the Company and Vector also engaged in negotiations regarding a potential alternative transaction pursuant to which the Company would file for protection under Chapter 11 of the Bankruptcy Code, and Bravo Holdco would acquire certain assets and assume certain liabilities of the Company in a transaction pursuant to Section 363 of the Bankruptcy Code, in which case it would not be necessary to obtain the approval of the Company’s stockholders to complete the transaction. However, these negotiations did not lead to any agreement, and all proposals for such a transaction made by Vector would have resulted in the Company’s stockholders receiving an amount, if any, that is significantly less than the $0.84 per share in cash provided for in the Merger Agreement. The Company terminated these

discussions on November 9, 2005 and continues to believe that the Merger remains the best available outcome for all of its stakeholders. The Company also believes that, if the Merger is not completed, the Company will likely become insolvent, unless its obligations under the Notes discussed ~~more fully~~below or other significant financial obligations are significantly restructured. For additional information about the Company’s liquidity situation, see the sections entitled “Convertible Note Agreements” and “Liquidity” below.

Convertible Note Agreements

In November 2004, the Company entered into a definitive agreement for the private placement of up to $20.0 million of convertible notes to five institutional investors (the “Securities Purchase Agreement”). Under the terms of the Securities Purchase Agreement, the Company issued an initial $16.0 million of convertible notes (the “Notes”) which are convertible, at the holders’ option, into common stock at a conversion price of $2.76 per share. The Notes bear interest at a rate of six percent per annum, and we were originally obligated to repay the principal amount of the initial $16.0 million of Notes in ~~Note 9~~15 equal monthly installments of $1.1 million, which began in June 2005. Under the terms of the Notes, the holders have the right to increase the Company’s monthly principal repayment obligation to $2.1 million as of December 2005 due to our cash balances falling below oncertain defined levels as of September 30, 2005. This increase, if invoked, would have the effect of requiring us to repay the principal amount in eight installments through June 2006. Certain principal payments that were due in the quarter ended September 30, 2005, have been deferred at the election of the investors for a period of eighteen months under the terms of the notes. Payments of future principal and interest may be made in either cash or, upon satisfaction of various conditions set forth in the notes, shares of our common stock. However, we currently have not satisfied the conditions required to make payments in stock, and we anticipate having to use cash to satisfy our future payment obligations under the Notes.

On July 25, 2005, the Company entered into an agreement with certain of the holders of its Notes regarding the treatment in connection with the Merger of the convertible notes and warrants issued to the noteholders under the Securities Purchase Agreement (the “July Noteholder Agreement”). Under the terms of the July Noteholder Agreement, all principal and accrued interest on the notes that is outstanding at the Effective Time of the Merger, together with certain other amounts payable to the noteholders, will be repaid within one business day following the Effective Time of the Merger and the notes and warrants will be extinguished. Subject to our performance of our obligations under the July Noteholder Agreement, the noteholders have consented to the completion of the Merger.

In October 2005, the Company inadvertently did not make timely payment of the third quarter interest payment due under the Notes of approximately $201,000 that was due on October 1, 2005. Lack of timely payment became an event of default on October 8, 2005 after non-payment continued for a ~~definitive~~period of over five business days. The Company made the third quarter interest payment promptly after discovery of the nonpayment, on October 14, 2005. The event of default permits each noteholder to require the Company to redeem 120% of all or any portion of the amounts outstanding under the applicable Note by delivering notice of such redemption to the Company, which redemption is required under the Notes to be paid within five business days after receipt of such redemption notice. If all of the noteholders elect such redemption, the Company will be obligated to pay within five business days after receipt of such election approximately $15.5 million in unpaid principal and interest. The accelerated repayment of all or any significant portion of such amount would leave the Company with insufficient working capital to conduct its business, and the Company does not presently have sufficient cash to meet such an accelerated repayment obligation.

On October 25, 2005, the Company entered into an agreement ~~subject~~with the noteholders under which the noteholders agreed not to ~~stockholder approval and other conditions,~~require redemption of the Notes, including the 20% premium payable thereunder, prior to ~~merge with a newly-formed portfolio company of~~November 16, 2005.

On October 29, 2005, Vector informed the Company that Vector Capital ~~Corporation~~III, L.P. (“~~Vector”~~Vector III”) ~~in a transaction in~~, an entity affiliated with Vector, had entered into transfer agreements with the noteholders pursuant to which Vector III agreed to acquire all of the issued and outstanding Notes. However, the Company believes that, under the terms of the July Noteholder Agreement, the noteholders are required to obtain its consent, not to be unreasonably withheld, prior to any transfer of the Notes. The Company has declined to provide its consent to date and at this time does not intend to provide its consent, which it believes is reasonable under the circumstances. Both Vector and the noteholders have disputed whether the Company’s ~~stockholders would receive $0.84 cash per share (the “Merger”). If approved by~~consent is required in connection with the purported transfer of the Notes and questioned the reasonableness of the Company’s ~~stockholders,~~refusal to consent, and these disputes are unresolved.

On November 8, 2005, counsel for the ~~Merger~~noteholders delivered to the Company a letter purporting to terminate the July Noteholder Agreement based on the Company’s alleged breaches of material representations, warranties or covenants by reason of the October 8, 2005 event of default and the Company’s refusal to consent to the transfer of the Notes to Vector III. Based on such purported termination, the noteholders assert that the Company’s consent to the transfer of the Notes from the noteholders to Vector III is ~~presently anticipated~~not required and the other provisions of the July Noteholder Agreement are no longer effective. The noteholders’ letter also asserts that the Company’s refusal to ~~close~~consent to the transfer is a breach of the October 25, 2005 agreement with the noteholders and entitles the noteholders to recover from the Company their attorneys’ fees in connection with the ~~late third~~alleged breaches. On November 9, 2005, Vector III notified us that it had completed its purchase of the Notes.

On November 9, 2005, the Company’s Chief Executive Officer and largest stockholder, Pehong Chen, advised the Company that he had offered to purchase the Notes from Vector III for a price equal to its cost plus an amount necessary to defray its reasonable expenses in connection with the purchase and sale of the Notes. Dr. Chen has also advised the Company’s Board of Directors that, if he becomes the owner of the Notes, he will negotiate in good faith with the Company to restructure the Notes so as to relieve the Company of any short-term liquidity threat. Pursuant to the July Noteholder Agreement, the Company’s Board of Directors has consented to the acquisition of the Notes by Dr. Chen. To the Company’s knowledge, Vector III has not accepted Dr. Chen’s offer to purchase the Notes, and there can be no assurance that Dr. Chen will acquire the Notes or ~~fourth quarter of 2005. Also as discussed more fully in Note 9 below,~~that the Company’s obligations under the Notes will be restructured.

Stockholder Class-Action Complaints

On July 28, 2005, representatives of the Company ~~have~~ received copies of four complaints relating to purported class action lawsuits, ~~that~~ each filed by an alleged holder of shares of our common stock and each filed in California Superior Court for the county of San Mateo. These complaints are captioned Gary Goberville, et al., vs. Pehong Chen, et al., Civ 448490, Cookie Schwartz, et al., vs. BroadVision,Inc., et al , Civ 448516, Leon Kotovich, et al., vs. BroadVision, Inc., et al , Civ 448518 and Anthony Noblett, et al., vs. BroadVision, Inc., et al , Civ 448519. Each claim names the Company’s directors and ~~the Company~~BroadVision, Inc. as defendants, and ~~that~~ each alleges that the director defendants violated their fiduciary duties to ~~the Company’s~~ stockholders by, among other things, failing to maximize the Company’s value and ignoring, or failing to adequately protect against, certain purported conflicts of interest. Each complaint seeks, among other things, injunctive relief and damages in an unspecified amount. On September 21, plaintiff Goberville filed an amended complaint alleging that defendants caused materially misleading information regarding a proposed merger to be disseminated to the Company’s stockholders. On October 20, 2005, the Court ordered consolidation of the four pending actions pursuant to the parties’ stipulation. In accordance with the Court’s order, plaintiffs’ consolidated amended complaint must be filed and served no later than December 5, 2005. In addition, defendants must complete by December 5, 2005, their production of relevant documents responsive to the first request for production of documents that were served on defendants by plaintiff Kotovich on August 9, 2005 and plaintiff Goberville on August 31, 2005.

Liquidity

Due to a combination of factors, the Company currently ~~anticipates~~is experiencing severe liquidity challenges and believes that its available cash resources will ~~likely~~ be insufficient to meet its payment obligations by some point in the fourth quarter of ~~2005.~~2005 unless its obligations under the Notes discussed above or other significant financial obligations are significantly restructured. The factors contributing to this belief include lower-than-anticipated revenues in 2005, costs associated with the Merger and cash payment requirements under ~~its outstanding convertible notes.~~the Notes, which will be subject to potential demand for payment in full by the holder(s) thereof on and after November 16, 2005. If the Company’s cash resources become insufficient to meet its obligations as they become due, which they will if repayment of any significant portion of the Notes is demanded and may even in the absence of such a demand, its business and future prospects would be seriously harmed and its ability to operate the business as a going concern and complete the merger ~~could~~would be seriously jeopardized. The Merger is subject to numerous conditions, including the approval of the Company’s stockholders, that could considerably delay or even prevent its completion, and there is no assurance that the Company will be able to obtain additional financing under its existing bank credit facility or otherwise. The requirements the Company must meet in order to obtain financing under its bank credit facility became more stringent as of July 2005. The Company was unable to meet such requirements as of September 30, 2005, and ~~the Company~~it presently anticipates being unable to meet the ~~new~~ requirements for the foreseeable future. In order to obtain financing from any other source, the Company would be required to obtain the approval of both the Vector portfolio company with which it has agreed to merge (provided that the Merger Agreement remains in full force and effect) and the ~~holders~~holder(s) of ~~its outstanding convertible notes.~~the Notes. There can be no assurance that the Company’s obligations under the Notes or other

significant financial obligations will be restructured.

If the Merger is not consummated, the Company will be required to raise additional funds, and it may be unable to do so on acceptable terms or at all. Its ability to obtain debt or equity funding would depend on a number of factors, including restrictive covenants contained in its current convertible note agreement and credit facilities, market conditions, its operating performance and investor interest. If adequate additional funding were not available, the Company would have insufficient working capital to continue executing its current business plan. Even if additional funding were available, the Company’s indebtedness and debt service obligations could continue to increase its vulnerability to general adverse economic and industry conditions, limit its flexibility in planning for, or reacting to, changes in its business and the industry in which it competes, and place it at a competitive disadvantage to less leveraged competitors and those with better access to capital resources.

Basis of Presentation ~~and Use of Estimates~~—Going Concern Uncertainty

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The Company is currently experiencing severe liquidity challenges. At September 30, 2005, the Company’s current liabilities exceed its current assets by approximately $30 million (negative working capital) resulting in a working capital ratio of less than 0.4 to 1.0. The Company currently does not have any additional financing arrangement in place from which to borrow additional funds as may be required to meet its near term cash requirements. Further, due to the event of default which occurred on October 8, 2005 relative to the convertible notes and the subsequent agreement entered into on October 25, 2005 with the convertible noteholders, the noteholders can demand payment in full on the approximate $15.5 million outstanding note balance and interest on or after November 16, 2005. If this were to occur, and if the Company was not able to obtain financing sufficient to fully repay the notes upon such demand, the Company would be forced to seek protection under the bankruptcy laws. These matters raise substantial doubt about the ability of the Company to continue in existence as a going concern. No adjustments to the carrying values or classification of the assets and liabilities in the accompanying financial statements have been made to take account of this uncertainty.

The accompanying consolidated financial statements include the accounts of the Company and its 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 ~~June~~September 30, 2005

and for the three and ~~six~~nine months ended ~~June~~September 30, 2005 and 2004 are unaudited. The condensed consolidated balance sheet at December 31, 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”).~~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 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”), 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, 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”) 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 25 and related interpretations when accounting for its stock option and stock purchase plans. In accordance with APB 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 ~~six~~nine months ended ~~June~~September 30, 2004, the Company recorded a stock-based compensation credit of $15,000. This credit was recorded as a result of granting a third party consultant shares of our common stock. The credit, which was calculated using the Black-Scholes model, was recorded as a reduction of sales and marketing expense.

We have determined pro forma information regarding net income (loss) and net income (loss) per share as if we had accounted for employee stock options under the fair value method as required by SFAS 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 income (loss) and net income (loss) per share would have been changed to the amounts indicated below (in thousands except per share data):

	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004			2005			2004			2005			2004
Net income (loss) as reported	$	(2,914	)	$	(1,492	)	$	4		$	(2,359	)
Net income (loss), as reported													$	(14,537	)	$	23,380		$	(14,532	)	$	21,021
Add: Stock-based employee compensation (income) expense included in reported net income (loss), net of related tax effects	—			—			—			(15		)	—			—			—			(15		)
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects	(7		)	(3,487		)	(1,153		)	(5,258		)	(219		)	(1,256		)	(1,668		)	(6,020		)
Pro forma net loss	$	(2,921	)	$	(4,979	)	$	(1,149	)	$	(7,632	)

Pro forma net income (loss)													$	(14,756	)	$	22,124		$	(16,200	)	$	14,986
Income (loss) per share:
Basic—as reported	$	(0.09	)	$	(0.04	)	$	0.00		$	(0.07	)	$	(0.42	)	$	0.70		$	(0.43	)	$	0.63
Basic—pro forma	$	(0.09	)	$	(0.15	)	$	(0.03	)	$	(0.23	)	$	(0.43	)	$	0.66		$	(0.47	)	$	0.45

Diluted—as reported	$	(0.09	)	$	(0.04	)	$	0.00		$	(0.07	)	$	(0.42	)	$	0.69		$	(0.43	)	$	0.61
Diluted—pro forma	$	(0.09	)	$	(0.15	)	$	(0.03	)	$	(0.23	)	$	(0.43	)	$	0.65		$	(0.47	)	$	0.44

Earnings Per Share Information

Basic income (loss) per share is computed using the weighted-average number of shares of common stock outstanding less shares subject to repurchase. Diluted 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 convertible debt using the as-if converted method, and shares subject to repurchase. The following table sets forth the basic and diluted income (loss) per share computational data for the periods presented.

There were ~~5.4 million and 5.8 million~~ potential common shares from the conversion of outstanding convertible notes excluded in the diluted shares outstanding during the three months and ~~six~~nine months ended ~~June~~September 30, 2005 ~~respectively, as the effect of such shares is anti-dilutive~~.. ~~There were 3,583,252 and 3,112,506 potential common shares excluded from the determination of diluted net loss per share for the three and six months ended June 30, 2004, respectively,~~ as the effect of such shares is anti-dilutive.

	Three Months Ended June 30,						Six Months Ended June 30,					Three Months Ended September 30,					Nine Months Ended September 30,
	2005			2004			2005		2004			2005			2004		2005			2004
Net income (loss)	$	(2,914	)	$	(1,492	)	$	4	$	(2,359	)	$	(14,537	)	$	23,380	$	(14,532	)	$	21,021

Weighted average common shares outstanding utilized for basic net income (loss) per share	34,181			33,476			34,077		33,392			34,320			33,599		34,159			33,459
Potential common stock issued for options	—			—			86		—			—			453		—			863
Weighted average common shares outstanding utilized for diluted net income (loss) per share:	34,181			33,476			34,163		33,392			34,320			34,052		34,159			34,322

Basic net income (loss) per share	$	(0.09	)	$	(0.04	)	$	0.00	$	(0.07	)	$	(0.42	)	$	0.70	$	(0.43	)	$	0.63
Diluted net income (loss) per share	$	(0.09	)	$	(0.04	)	$	0.00	$	(0.07	)	$	(0.42	)	$	0.69	$	(0.43	)	$	0.61

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 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 ~~June~~September 30, 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 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 SAB No. 100, Restructuring and Impairment 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 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 (“(“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.

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 (“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~~paid 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~~were made in February 2005, ~~the second was made in~~ May 2005, and ~~the third is due in~~ September 2005.

~~Information about certain recently filed legal proceedings is set forth in Note 9 below.~~

Concentrations of Credit Risk

Financial assets that potentially subject us to significant concentrations of credit risk consist principally of cash,

cash equivalents, and trade accounts receivable. The Company maintains its cash and cash equivalents with 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-months~~three months ended ~~June~~September 30, 2005 and ~~June~~September 30, 2004, no one customer accounted for more than 10% of total revenue. As of ~~June~~September 30, 2005 and December 31, 2004, no customer individually accounted for more than 10% of accounts receivable.

Foreign Currency Transactions

During fiscal 2004, the Company changed the functional currencies of all foreign subsidiaries from the U.S. dollar to the local currency of the respective countries. Assets and liabilities of these subsidiaries are translated into U.S. dollars at the 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 income (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, 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 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 impact 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, restricted cash, accounts receivable, accounts payable, debt, and at December 31, 2004, equity investments. 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, 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.

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 Condensed Consolidated Balance Sheets. The accumulated balances for each classification of comprehensive income (loss) consist of the following, net of taxes (unaudited, in thousands):

	Foreign Currency Translation			Accumulated Other Comprehensive Loss			Foreign Currency Translation			Accumulated Other Comprehensive Income (Loss)
Balance, December 31, 2004	$	(172	)	$	(172	)	$	(172	)	$	(172	)
Net change during period	23			23			4			4

Balance, June 30, 2005	$	(149	)	$	(149	)
Balance, September 30, 2005							$	(168	)	$	(168	)

New Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123 (revised 2004), 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 employee stock options, to be recognized in the financial statements based on their fair values beginning with the first

interim or annual period beginning after June 15, 2005, with early adoption encouraged. On April 14, 2005, the Securities and 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 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 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 its adoption will have 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 an exception for exchanges that do not have commercial substance. SFAS 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for periods beginning after June 15, 2005. We do not expect that adoption of SFAS 153 will have a material effect on our consolidated financial position, consolidated results of operations, or liquidity.

Note 2. Selected Balance Sheet Detail

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

	June 30, 2005			December 31, 2004			September 30, 2005			December 31, 2004
	(unaudited)						(unaudited)
Furniture and fixtures	$	3,815		$	4,036		$	3,781		$	4,036
Computers and software	48,677			49,258			48,550			49,258
Leasehold improvements	6,190			6,086			6,185			6,086
	58,682			59,380			58,516			59,380
Less accumulated depreciation and amortization	(55,742		)	(55,814		)	(55,904		)	(55,814		)
	$	2,940		$	3,566		$	2,612		$	3,566

Accrued expenses consisted of the following (in thousands):

	June 30, 2005		December 31, 2004		September 30, 2005		December 31, 2004
	(unaudited)				(unaudited)
Employee benefits	$	1,632	$	1,253	$	1,226	$	1,253
Commissions and bonuses	691		1,334		643		1,334
Sales and other taxes	4,116		5,085		3,767		5,085
Restructuring (See Note 6)	4,783		26,292		6,058		26,292
Other	4,571		6,781		4,474		6,781
	$	15,793	$	40,745	$	16,168	$	40,745

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

	June 30, 2005		December 31, 2004		September 30, 2005		December 31, 2004
	(unaudited)				(unaudited)
Restructuring (See Note 6)	$	6,584	$	7,871	$	1,955	$	7,871
Other	411		407		327		407
	$	6,995	$	8,278	$	2,282	$	8,278

Note 3. Bank Borrowings, Long-Term Debt and Other Non-Current Liabilities

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

June 30, 2005

December 31, 2004

(unaudited)

Convertible notes, 6% coupon, due in various maturities beginning in June 2005

$
12,473

$
11,982

Bank borrowings

15,000

20,000

Term debt

616

1,027

28,089

33,009

Less: Current portion of long-term debt

(27,927
)
(25,566
)

Long-term debt, net of current portion

$
162

$
7,443

	September 30, 2005			December 31, 2004
	(unaudited)
Convertible notes, 6% coupon, due in various maturities beginning in June 2005	$	11,265		$	11,982
Bank borrowings	—			20,000
Term debt	503			1,027
	11,768			33,009
Less: Current portion of long-term debt	(11,768		)	(25,566		)
Long-term debt, net of current portion	$	—		$	7,443

In November 2004, the Company entered into a definitive agreement for the private placement of up to $20.0 million of convertible notes to five institutional investors. The Company issued an initial $16.0 million of convertible notes which are convertible, at the holders’ option, into common stock at a conversion price of $2.76 per share. The convertible notes bear interest at a rate of six percent per annum, and the Company was originally obligated to repay the principal amount of the initial $16.0 million of notes in 15 equal monthly installments of $1.1 million, which began in June 2005. Under the terms of the notes, , the holders have the right to increase the Company’s monthly principal repayment obligation ~~will increase~~ to $2.1 million ~~beginning in September~~as of December 2005 due to the Company’s cash balances falling below certain defined levels as of ~~June~~September 30, 2005. This increase, ~~has~~if invoked, would have the effect of requiring the Company to repay the principal amount in ~~nine~~eight installments through ~~April~~June 2006. Certain principal payments that were due in the quarter ended September 30, 2005, have been deferred at the election of the investors for a period of eighteen months under the terms of the notes. Payments of future principal and interest may be made in either cash or, upon satisfaction of various conditions set forth in the notes, shares of common

stock. However, the Company currently has not satisfied the conditions required to make payments in stock, and anticipates having to use cash to satisfy all of its future payment obligations under the notes.

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 ~~June~~September 30, 2005 and December 31, 2004, a total of ~~$14.9~~$12.9 million and $16.0 million, respectively, in face value convertible notes was outstanding. The Company is recording the difference between the face value and discounted amount as additional interest expense over the estimated life of the notes. These notes are recorded on the Condensed Consolidated Balance Sheets at December 31, 2004, and ~~June~~September 30, 2005, at the discounted amounts of $12.0 million and ~~$12.5~~$11.3 million, respectively.

In October 2005, the Company inadvertently did not make timely payment of the third quarter interest payment due under the Notes of approximately $201,000 that was due on October 1, 2005. Lack of timely payment became an event of default on October 8, 2005 after non-payment continued for a period of over five business days. The Company made the third quarter interest payment promptly after discovery of the nonpayment, on October 14, 2005. The event of default permits each noteholder to require the Company to redeem 120% of all or any portion of the amounts outstanding under the applicable Note by delivering notice of such redemption to the Company, which redemption is required under the Notes to be paid within five business days after receipt of such redemption notice. If all of the noteholders elect such redemption, the Company will be obligated to pay within five business days after receipt of such election approximately $15.5 million in unpaid principal and interest. The accelerated repayment of all or any significant portion of such amount would leave the Company with insufficient working capital to conduct its business, and the Company does not presently have sufficient cash to meet such an accelerated repayment obligation.

On October 25, 2005, the Company entered into an agreement with the noteholders under which the noteholders agreed not to require redemption of the Notes, including the 20% premium payable thereunder, prior to November 16, 2005.

In June 2005, the Company renewed and amended its revolving credit facility. The amount available under the revolving line of credit is up to ~~$20.0~~$15.0 million, subject to certain borrowing limitations based on the Company’s unrestricted cash balances. Borrowings under the revolving line of credit are collateralized by all of the Company’s assets and bear interest at the bank’s prime rate at December 31, 2004 and ~~June 30, 2005 and~~ prime rate plus 1.0% ~~thereafter (6.0%~~at September 30, 2005 (6.75% as of ~~June~~September 30, 2005 and 5.25% as of December 31, 2004). As of ~~June 30, 2005 and~~ December 31, 2004, ~~$15.0 million and~~ $20.0 million, ~~respectively, remained~~was outstanding under the Company’s revolving credit facility. As of September 30, 2005, there was no outstanding balance on the line of credit. As of July 1, 2005, under the renewed and amended agreement, the requirements the Company must meet in order to ~~continue to~~ access the credit facility became more ~~stringent under the renewed and amended agreement, and the~~stringent. The Company ~~expects that, beginning~~was not in ~~the third quarter~~compliance with these new requirements as of September 30, 2005, and ~~for the foreseeable future,~~expects that it will be unable to meet the new ~~requirements.~~requirements in future periods.

As of ~~June~~September 30, 2005 and December 31, 2004, outstanding term debt borrowings were approximately ~~$616,000~~$503,000 and $1.0 million, respectively. Borrowings bear interest at the bank’s prime rate of 5.25% plus up to 1.25% as of December 31, 2004 and the bank’s prime rate of ~~6.0%~~6.75% plus up to 3.0% as of ~~June~~September 30, 2005. ~~Principal and interest are due in monthly payments through maturity based on~~Under the terms of the ~~facilities. Principal~~term debt agreements, principal and interest payments of ~~$227,000~~$40,000 are due ~~for the remainder of 2005,~~monthly through October 2006 and payments of ~~$389,000~~$11,000 are due thereafter. Due to the Company’s default under its convertible debentures described above, the term debt is also in default, and there the entire balance of $503,000 at September 30, 2005 is classified as currently due.

Commitments totaling ~~$3.9~~$2.0 million and $24.3 million in the form of standby letters of credit were issued on the Company’s behalf from financial institutions as of ~~June~~September 30, 2005 and December 31, 2004, respectively, primarily in favor of the Company’s various landlords to secure obligations under the Company’s facility leases. ~~Accordingly, $3.9~~As these letters of credit were cash secured, $2.0 million and $24.3 million have been presented as restricted cash in the accompanying Condensed Consolidated Balance Sheets as of ~~June~~September 30, 2005 and December 31, 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 ~~June~~September 30, 2005 or December 31, 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.

A summary of total future minimum lease payments, net of future sublease income, as of ~~June~~September 30, 2005, under noncancelable operating lease agreements is as follows (in millions):

Years Ending December 31,	Operating Leases		Operating Leases
2005	$	2.4	$	1.2
2006	3.1		3.2
2007	4.2		4.2
2008	2.1		2.1
2009 and thereafter	6.3		6.2

Total minimum lease payments	$	18.1	$	16.9

See Note 6 of Notes to Condensed Consolidated Financial Statements for information about additional payments due under previously negotiated lease buyout transactions.

Standby Letter of Credit Commitments

As of ~~June~~September 30, 2005, the Company had ~~$3.9~~$2.0 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

~~Information about certain recently filed legal proceedings is set forth in Note 9 below.~~

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 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.

which the Company ~~will pay~~paid 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~~were made in February 2005, ~~the second was made in~~ May 2005 and ~~the third is due in~~ September 2005.

14On July 28, 2005, representatives of the Company received copies of four complaints relating to purported class action lawsuits, each filed by an alleged holder of shares of our common stock and each filed in California Superior Court for the county of San Mateo. These complaints are captioned Gary Goberville, et al., vs. Pehong Chen, et al., Civ 448490, Cookie Schwartz, et al., vs. BroadVision,Inc., et al , Civ 448516, Leon Kotovich, et al., vs. BroadVision, Inc., et al , Civ 448518 and Anthony Noblett, et al., vs. BroadVision, Inc., et al , Civ 448519. Each claim names the Company’s directors and BroadVision, Inc. as defendants, and each alleges that the director defendants violated their fiduciary duties to stockholders by, among other things, failing to maximize the Company’s value and ignoring, or failing to adequately protect against, certain purported conflicts of interest. Each complaint seeks, among other things, injunctive relief and damages in an unspecified amount. On September 21, plaintiff Goberville filed an amended complaint alleging that defendants caused materially misleading information regarding a proposed merger to be disseminated to the Company’s stockholders. On October 20, 2005, the Court ordered consolidation of the four pending actions pursuant to the parties’ stipulation. In accordance with the Court’s order, plaintiffs’ consolidated amended complaint must be filed and served no later than December 5, 2005. In addition, defendants must complete by December 5, 2005, their production of relevant documents responsive to the first request for production of documents that were served on defendants by plaintiff Kotovich on August 9, 2005 and plaintiff Goberville on August 31, 2005.

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 America (“Americas”), Europe and Asia Pacific and the Middle East (“Asia/Pacific”). 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 June 30,				Six Months Ended June 30,				Three Months Ended September 30,				Nine Months Ended September 30,
	2005		2004		2005		2004		2005		2004		2005		2004
Software licenses	$	3,391	$	7,097	$	7,807	$	14,937	$	3,134	$	4,654	$	10,941	$	19,591
Consulting services	5,156		5,182		10,303		10,094		4,403		5,013		14,706		15,105
Maintenance	6,967		7,849		13,771		15,986		6,540		7,557		20,311		23,545
Total revenues	$	15,514	$	20,128	$	31,881	$	41,017	$	14,077	$	17,224	$	45,958	$	58,241

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 (unaudited, in thousands):

	Three months ended June 30,				Six Months Ended June 30,
	2005		2004		2005		2004		Three months ended September 30,				Nine Months Ended September 30,
									2005		2004		2005		2004
Revenues:
Americas	$	9,058	$	8,851	$	17,696	$	18,487	$	8,252	$	9,269	$	25,948	$	27,772
Europe	5,411		8,982		11,329		19,080		4,359		6,134		15,688		25,210
Asia/Pacific	1,045		2,295		2,856		3,450		1,466		1,821		4,322		5,259
Total revenues	$	15,514	$	20,128	$	31,881	$	41,017	$	14,077	$	17,224	$	45,958	$	58,241

	June 30, 2005		December 31, 2004
					September 30, 2005		December 31, 2004
Long-Lived Assets:
Americas	$	59,828	$	60,312	$	47,806	$	60,312
Europe	326		531		291		531
Asia/Pacific	499		527		463		527
Total long-lived assets	$	60,653	$	61,370	$	48,560	$	61,370

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

Note 6. Restructuring Charges

Through ~~June~~September 30, 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 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 SFAS 146, Accounting for Costs Associated with Exit or Disposal ~~Activities~~.Activities.

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.

As of ~~June~~September 30, 2005, the total restructuring accrual of ~~$11.4~~$8.0 million consisted of the following (in millions):

	Current		Non-Current		Total		Current		Non-Current		Total
Severance and Termination	$	1.1	$	—	$	1.1	$	0.7	$	—	$	0.7
Excess Facilities	3.7		6.6		10.3		5.4		1.9		7.3

Total	$	4.8	$	6.6	$	11.4	$	6.1	$	1.9	$	8.0

The Company estimates that the ~~$1.1~~$0.7 million severance and termination accrual will be nearly paid in full by 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		Total future minimum payments
2005	$	3.7	$	0.4
2006	4.8		5.2
2007	0.7		0.7
2008	0.5		0.6
2009 and thereafter (through October 2010)	0.6		0.4

Total minimum facilities payments	$	10.3	$	7.3

Of this excess facilities accrual, $2.5 million relates to payments due in fiscal 2005 under lease termination agreements, and $7.8 million relates to future minimum lease payments, fees and expenses, net of estimated sublease income and planned company occupancy.19

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

Three Months Ended June 30, 2005

Lease cancellations and commitments

$
3,846

$
(146
)
$
264

$
3,964

Termination payments to employees and related costs

115

627

(87
)
655

$
3,961

$
481

$
177

$
4,619

Three Months Ended June 30, 2004

Lease cancellations and commitments

$
21,683

$
—

$
—

$
21,683

Termination payments to employees and related costs

95

158

(89
)
164

$
21,778

$
158

$
(89
)
$
21,847

Six Months Ended June 30, 2005

Lease cancellations and commitments

$
21,824

$
(777
)
$
(17,083
)
$
3,964

Termination payments to employees and related costs

365

532

(242
)
655

$
22,189

$
(245
)
$
(17,325
)
$
4,619

Six Months Ended June 30, 2004

Lease cancellations and commitments

$
21,683

$
—

$
—

$
21,683

Termination payments to employees and related costs

242

476

(554
)
164

$
21,925

$
476

$
(554
)
$
21,847

	Accrued restructuring costs beginning		Amounts charged to restructuring costs and other			Amounts paid or written off			Accrued restructuring costs, ending
Three Months Ended September 30, 2005
Lease cancellations and commitments	$	3,964	$	(61	)	$	175		$	4,078
Termination payments to employees and related costs	655		443			(775		)	323
	$	4,619	$	382		$	(600	)	$	4,401
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
Nine Months Ended September 30, 2005
Lease cancellations and commitments	$	21,824	$	(838	)	$	(16,908	)	$	4,078
Termination payments to employees and related costs	365		975			(1,017		)	323
	$	22,189	$	137		$	(17,925	)	$	4,401
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, beginning		Amounts charged to restructuring costs and other			Amounts paid or written off			Accrued restructuring costs, ending		Accrued restructuring costs, beginning		Amounts charged to restructuring costs and other			Amounts paid or written off			Accrued restructuring costs, ending
Three Months Ended June 30, 2005
Three Months Ended September 30, 2005
Lease cancellations and commitments	$	8,871	$	(172	)	$	(2,373	)	$	6,326	$	6,326	$	(137	)	$	(2,930	)	$	3,259
Termination payments to employees and related costs	445		—			(23		)	422		422		—			(70		)	352
	$	9,316	$	(172	)	$	(2,396	)	$	6,748	$	6,748	$	(137	)	$	(3,000	)	$	3,611
Three Months Ended June 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
Nine Months Ended September 30, 2005
Lease cancellations and commitments	$	78,292	$	521		$	(5,620	)	$	73,193	$	11,515	$	(287	)	$	(7,969	)	$	3,259
Termination payments to employees and related costs	429		—			—			429		459		—			(107		)	352
	$	78,721	$	521		$	(5,620	)	$	73,662	$	11,974	$	(287	)	$	(8,076	)	$	3,611
Six Months Ended June 30, 2005
Nine Months Ended September 30, 2004
Lease cancellations and commitments	$	11,515	$	(150	)	$	(5,039	)	$	6,326	$	81,143	$	(33,704	)	$	(33,838	)	$	13,601
Termination payments to employees and related costs	459		—			(37		)	422		429		—			—			429
Write-off on disposal of assets and related costs											1,883		(9		)	(512		)	1,362
	$	11,974	$	(150	)	$	(5,076	)	$	6,748	$	83,455	$	(33,713	)	$	(34,350	)	$	15,392
Six Months Ended June 30, 2004
Lease cancellations and commitments	$	83,026	$	773		$	(10,606	)	$	73,193
Termination payments to employees and related costs	429		—			—			429
	$	83,455	$	773		$	(10,606	)	$	73,622

On June 29, 2005, the Company’s Board of Directors approved a business restructuring plan, primarily consisting of headcount reductions, designed to adjust expenses to a level more consistent with anticipated revenues. The reduction byincluded approximately 63 employees, or 22% of the Company’s ~~workforce, is expected to be completed by the end of the third quarter of 2005. It is expected that the~~workforce. The Company ~~will incur pre-tax~~recorded severance ~~costs~~charges of approximately ~~$1.3 million, of which approximately $665,000 was incurred~~$443,000 and $627,000 in the ~~second quarter of~~three-month periods ended September 30, 2005 and ~~was charged to the restructuring accrual. The Company expects to incur additional severance costs of approximately $600,000 in the third quarter of 2005.~~ June 30, 2005, respectively.

As mentioned above, the Company has based its excess facilities accrual, in part, upon estimates of future sublease income. 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 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 sublease income differs from amounts currently expected. The 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.

Note 7. Goodwill and Other Intangible Assets

On January 1, 2002, the Company adopted SFAS 142. Under SFAS 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 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.

~~The~~ While there was no accounting charge to record upon adoption of SFAS 142, the Company concluded that, at September 30, 2005, based ~~upon~~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-step 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 step requires a comparison of the fair value of the Company (reporting unit) to its ~~stock in relation~~net book value. If the fair value is greater, then no impairment is deemed to have occurred. If the ~~Company’s~~fair value is less, then the second step must be performed to determine the amount, if any, of actual impairment. The Company completed the first step and has determined that its net book value at ~~June~~September 30, 2005 exceeded its fair value on that date, and ~~December 31, 2004, there was no~~as a result, the Company has begun the process of determining the fair values of its identifiable tangible and intangible assets and liabilities for purposes of determining the implied fair value of its goodwill and any resulting goodwill impairment. As of the date of the filing of this Form 10-Q, the Company has not completed step two of this impairment analysis due to the limited time period from the first indication of potential impairment to the date of this filing and the complexities involved in estimating the fair values of certain assets and liabilities, in particular, long-lived tangible and intangible assets (including intangible assets that have not previously been recorded in the Company’s financial statements). SFAS 142 provides that in circumstances in which step two of the impairment analysis has not been completed, a company should recognize an estimated impairment charge to the extent that a Company determines that it is probable that an impairment loss has occurred and such impairment loss can be reasonably estimated using the guidance provided in SFAS 5. Based on the foregoing, the Company has recognized a goodwill impairment charge of $13.2 million at September 30, 2005, which represents management’s preliminary estimate of the probable goodwill impairment based on the fair value analysis completed to date. The Company has used the quoted market price of the Company’s common stock (market capitalization) as a basis for determining the fair value of the reporting unit. The Company expects to complete step two of the impairment analysis during the fourth quarter of 2005 and, to the extent that the completed analysis indicates additional goodwill impairment in excess of management’s preliminary estimate, the Company will recognize such additional impairment ~~of goodwill warranted.~~in the fourth quarter. See Note 9. Subsequent Events.

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 future non-cash goodwill impairment charge for all or a portion of the goodwill balance at ~~June~~September 30, 2005.

~~Additionally, upon~~Upon adoption of SFAS 141 and SFAS 142, the Company no longer amortizes its non-technology based intangible asset, or assembled workforce. As of December 31, 2003, completed technology intangibles had been fully amortized.

Note 8. Warrants

As of ~~June~~September 30, 2005, the following warrants to purchase the Company’s common stock were outstanding:

Description	Underlying Shares	Exercise Price per Share
Issued to landlord in real estate buyout transaction in August 2004	700,000	$	5.00
Issued to convertible notes 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 connection with the real estate transaction has a term of five years and isbecame exercisable beginning in August 2005. The warrant issued in connection with the convertible notes also has a term of five years and became exercisable beginning in May 2005.

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 warrants are exercised. For the ~~three-month~~three months and ~~six~~nine months ended ~~June~~September 30, 2005, the Company recorded gains related to the revaluation of warrants to the landlord and note holders of ~~$1.0~~$0.7 and ~~$3.5~~$4.2 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.

Note 9. Subsequent Events

~~On July 25,~~As discussed in Note 7 “Goodwill and Other Intangible Assets,” as of September 30, 2005, the Company ~~entered into~~recognized a goodwill impairment charge of $13.2 million in accordance with the requirements of SFAS No. 142. Subsequent to September 30, 2005, the Company has experienced a significant decline in the trading price of its common stock and hence in the Company’s market capitalization. In applying the accounting requirements for recognizing and measuring an ~~Agreement~~impairment loss under SFAS No. 142, the Company uses the quoted market price of the Company’s stock (market capitalization) as the basis for determining the fair value of the Company (the reporting unit) and ~~Plan~~then allocates the fair value of ~~Merger (the “Merger Agreement”) with Bravo Holdco, an exempted company with limited liability incorporated~~the reporting unit to all of the assets and liabilities of that unit in order to determine the implied fair value of goodwill. Because of the significant decline in the trading price and market capitalization of the Company subsequent to September 30, 2005, the Company anticipates recording a significant additional non-cash charge for the impairment of goodwill in the three-month period ending December 31, 2005. The amount of the impairment charge will be determined based upon a number of factors, including the fair value of the Company’s assets and liabilities at December 31, 2005.

In October 2005, the Company inadvertently did not make timely payment of the third quarter interest payment due under the ~~laws~~Notes of approximately $201,000 that was due on October 1, 2005. Lack of timely payment became an event of default on October 8, 2005 after non-payment continued for a period of over five business days. The Company made the third quarter interest payment promptly after discovery of the ~~Cayman Islands (“Bravo Holdco”), and Bravo Merger Sub, LLC, a Delaware limited liability company and wholly owned subsidiary~~nonpayment, on October 14, 2005. The event of ~~Bravo Holdco (“Merger Sub”), pursuant~~default permits each noteholder to ~~which, subject~~require the Company to ~~satisfaction~~redeem 120% of all or ~~waiver~~any portion of the ~~conditions therein, it~~amounts outstanding under the applicable Note by delivering notice of such redemption to the Company, which redemption is ~~intended that~~required under the Notes to be paid within five business days after receipt of such redemption notice. If all of the noteholders elect such redemption, the Company will ~~merge~~be obligated to pay within five business days after receipt of such election approximately $15.5 million in unpaid principal and interest. The accelerated repayment of all or any significant portion of such amount would leave the Company with ~~and into Merger Sub,~~insufficient working capital to conduct its business, and the ~~Company’s separate corporate existence will thereupon cease, but Bravo Holdco may, at its option, elect~~Company does not presently have sufficient cash to amend the Merger Agreement to provide for (i) the merger of Merger Sub or any other affiliate of Bravo Holdco or Bravo Holdco’s majority stockholder, Vector Capital Corporation, (“Vector”) with and into the Company, or (ii) the Company’s merger with and into any other affiliate of Bravo Holdco or Vector (the “Merger”).

Under the terms of the Merger Agreement, the holders of shares of the Company’s common stock (other than stockholders who exercise appraisal rights under Delaware law) that are outstanding immediately prior to the consummation of the Merger will receive $0.84 in cash for each share of common stock at the time of the consummation of the Merger (the “Effective Time”). In addition, at the Effective Time, each vested stock option that is outstanding immediately prior to the consummation of the Merger will be automatically converted intomeet such an ~~amount in cash equal to, for each share of common stock underlying such option, the excess (if any) of $0.84 over the per share exercise price of such option.~~

The consummation of the Merger is conditioned upon, among other things, the adoption of the Merger Agreement by the holders of a majority of the outstanding shares of the Company’s common stock, customary regulatory approvals and other closing conditions. In order to induce Bravo Holdco to enter into the Merger Agreement, Dr. Pehong Chen, the Company’s Chairman, President and Chief Executive Officer, on behalf of himself and a trust of which he is a Trustee (the “Chen Trust”), has entered into a voting agreement with Bravo Holdco pursuant to which Dr. Chen has agreed, among other things, to vote all shares of the Company’s common stock held by himself and the Chen Trust in favor of the Merger and the adoption of the Merger Agreement. Dr. Chen and the Chen Trust hold an aggregate of 5,874,985 shares of common stock (approximately 17% of the outstanding shares of common stock on July 25, 2005) and options to purchase an additional 2,757,551 shares of common stock.

The Merger Agreement contains certain termination rights and expense reimbursement provisions in favor of both the Company and Bravo Holdco. Upon termination of the Merger Agreement under certain specified conditions, the Company may be required to reimburse the documented transaction expenses of Bravo Holdco, Merger Sub and Vector, up to a maximum of $980,000. Upon termination of the Merger Agreement under certain other specified conditions, BroadVision may be required to pay Bravo Holdco the greater of (i) this expense reimbursement or (ii) a termination fee of $862,600.

~~The Merger is expected to close in the late third or fourth quarter of 2005; however, there can be no assurance that the Merger will be consummated in that time period or at all.~~

In connection with the execution and delivery of the Merger Agreement, Vector entered into a letter agreement in favor of the Company and Bravo Holdco pursuant to which, among other things, Vector committed to invest funds in Bravo Holdco as a source of funding for the Merger. Vector’s commitment is conditioned only upon the prior fulfillment or waiver of each and all of the conditions precedent to Bravo Holdco’s and Merger Sub’s obligations to consummate the Merger under the Merger Agreement. Vector has expressed its desire to have Dr. Chen remain involved with the Company after the Merger and has entered into an arrangement with Dr. Chen under which Dr. Chen may purchase up to 9.5% of the equity securities of Bravo Holdco.accelerated repayment obligation.

On ~~July~~October 25, 2005, the Company entered into an agreement with ~~certain~~the noteholders under which the noteholders agreed not to require redemption of the ~~holders~~Notes, including the 20% premium payable thereunder, prior to November 16, 2005.

On October 29, 2005, Vector informed the Company that Vector Capital III, L.P. (“Vector III”), an entity affiliated with Vector, had entered into transfer agreements with the noteholders pursuant to which Vector III agreed to acquire all of ~~its~~the issued and outstanding ~~convertible notes which were originally issued pursuant to~~Notes. However, the Company believes that, under the terms of ~~a Securities Purchase~~the July Noteholder Agreement, ~~dated as~~the noteholders are required to obtain its consent, not to be unreasonably withheld, prior to any transfer of ~~November 10, 2004 (the “Securities Purchase Agreement”), regarding~~ the ~~treatment~~Notes. The Company has declined to provide its consent to date and at this time does not intend to provide its consent, which it believes is reasonable under the circumstances. Both Vector and the noteholders have disputed whether the Company’s consent is required in connection with the ~~Merger~~purported transfer of the ~~convertible notes~~Notes and ~~warrants issued~~questioned the reasonableness of the Company’s refusal to consent, and these disputes are unresolved.

On November 8, 2005, counsel for the noteholders delivered to the ~~noteholders under~~Company a letter purporting to terminate the ~~Securities Purchase~~July Noteholder Agreement ~~(the “Noteholder Agreement”). Under~~based on the ~~terms~~Company’s alleged breaches of material representations, warranties or covenants by reason of the October 8, 2005 event of default and the Company’s refusal to consent to the transfer of the Notes to Vector III. Based on such purported termination, the noteholders assert that the Company’s consent to the transfer of the Notes from the noteholders to Vector III is not required and the other provisions of the July Noteholder Agreement ~~all principal and accrued interest on~~are no longer effective. The noteholders’ letter also asserts that the ~~notes that~~Company’s refusal to consent to the transfer is ~~outstanding at the Effective Time~~a breach of the ~~Merger, together~~October 25, 2005 agreement with ~~certain other amounts payable~~the noteholders and entitles the noteholders to recover from the Company their attorneys’ fees in connection with the alleged breaches. On November 9, 2005, Vector III notified us that it had completed its purchase of the Notes.

On November 9, 2005, the Company’s Chief Executive Officer and largest stockholder, Pehong Chen, advised the Company that he had offered to purchase the Notes from Vector III for a price equal to its cost plus an amount necessary to defray its reasonable expenses in connection with the purchase and sale of the Notes. Dr. Chen has also advised the Company’s Board of Directors that, if he becomes the owner of the Notes, he will negotiate in good faith with the Company to restructure the Notes so as to relieve the Company of any short-term liquidity threat. Pursuant to the ~~noteholders, will be repaid within one business day following~~July Noteholder Agreement, the ~~Effective Time~~Company’s Board of Directors has consented to the acquisition of the ~~Merger~~Notes by Dr. Chen. To the Company’s knowledge, Vector III has not accepted Dr. Chen’s offer to purchase the Notes, and there can be no assurance that Dr. Chen will acquire the ~~notes and warrants will be extinguished. Subject to our performance of our~~Notes or that the Company’s obligations under the ~~Noteholder Agreement, the noteholders have consented to the completion of the Merger.~~

The Company’s entry into the Merger Agreement and the Noteholder Agreement is further described on the Schedule 14A filed on July 26, 2005 with the Securities and Exchange Commission and the Current Report on Form 8-K filed with the Securities and Exchange Commission on July 29, 2005.

On July 28, 2005, representatives of the Company received copies of four complaints relating to purported class action lawsuits, each filed by an alleged holder of shares of our common stock and each filed in California Superior Court for the county of San Mateo. These complaints are captioned ~~Gary Goberville, et al., vs. Pehong Chen, et al.,~~ ~~Civ 448490,~~ ~~Cookie Schwartz, et al., vs. BroadVision, Inc., et al~~~~, Civ 448516,~~ ~~Leon Kotovich, et al., vs. BroadVision, Inc., et al~~~~, Civ 448518 and~~ ~~Anthony Noblett, et al., vs. BroadVision, Inc., et al~~, Civ 448519. Each claim names the Company’s directors and BroadVision, Inc. as defendants, and each alleges that the director defendants violated their fiduciary duties to stockholders by, among other things, failing to maximize the Company’s value and ignoring, or failing to adequately protect against, certain purported conflicts of interest. Each complaint seeks, among other things, injunctive relief and damages in an unspecified amount. The Company anticipates that similar actions mayNotes will be ~~filed in the future against some or all of the same defendants.~~restructured.

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 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

BroadVision solutions help customers rapidly increase revenues and reduce 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.

Over 1,000 customers—including U.S. Air Force, Lockheed Martin, Netikos, Circuit City, Iberia L.A.E. and 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 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, in particular the selling challenges created by our deteriorating financial condition, we have seen significant declines in our revenue over the past four fiscal years.

Our objective is to further our position as a ~~leading~~global 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~~assurance 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~~is intended to allow 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

During the third and fourth quarters of 2004, we reached agreements with certain landlords to extinguish approximately $155.0 million of future real estate obligations. We made cash payments of $20.7 million in 2004 and ~~an additional cash payment of $22.5 million~~$23.1million in the first ~~half~~nine months 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, which became exercisable ~~beginning~~ in August 2005. As a 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 $4.5 million if we exercise an option to terminate this residual real estate 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 the non-current restructuring accrual ~~of $6.6 million~~ as of ~~June~~September 30, 2005.

In November 2004, we entered into a definitive agreement for the private placement of up to $20.0 million of convertible notes to five institutional investors. WeUnder the terms of the definitive agreement, we issued an initial $16.0 million of notes which will be convertible, at the holders’ option, into common stock at a conversion price of $2.76 per share. The notes bear interest at a rate of six percent per annum, and we were originally obligated to repay the principal amount of the initial $16.0 million of notes in 15 equal monthly installments of $1.1 million, which began in June 2005. Under the terms of the

notes, the holders have the right to increase the Company’s monthly principal repayment obligation ~~will increase~~ to $2.1 million ~~beginning in September~~as of December 2005 due to our cash balances falling below certain defined levels as of ~~June~~September 30, 2005. This increase, ~~has~~if invoked, would have the effect of requiring us to repay the principal amount in ~~nine~~eight installments through ~~April~~June 2006. Certain principal payments that were due in the quarter ended September 30, 2005, have been deferred at the election of the investors for a period of eighteen months under the terms of the notes. Payments of future principal and interest may be made in either cash or, upon satisfaction of various conditions set forth in the notes, shares of our common stock. However, we currently have not satisfied the conditions required to make payments in stock, and we anticipate having to use cash to satisfy ~~all of~~ our future payment obligations under the notes.

On June 29, 2005, the Company’s Board of Directors approved a business restructuring plan, primarily consisting of headcount reductions, designed to adjust expenses to a level more consistent with anticipated revenues. The reduction byincluded approximately 63 employees, or 22% of our ~~workforce, is expected to be completed by the end of the third quarter of 2005.~~workforce. We ~~expect that we will incur pre-tax~~recorded severance ~~costs~~charges of approximately ~~$1.3 million, of which approximately $665,000 was incurred~~$443,000 and $627,000 in the ~~second quarter of~~three-month periods ended September 30, 2005 and ~~was charged to the restructuring accrual. We expect to incur additional severance costs of approximately $600,000 in the third quarter of 2005.~~June 30, 2005, respectively.

On July 25, 2005, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Bravo Holdco (“Bravo Holdco”), a ~~newly-formed portfolio~~newly formed exempted company with limited liability incorporated under the laws of the Cayman Islands and wholly owned subsidiary of Vector Capital Corporation (“Vector”)., and Bravo Merger Sub, LLC, a newly formed Delaware limited liability company and wholly owned subsidiary of Bravo Holdco. Under the terms of the Merger Agreement, the holders of shares of our common stock (other than stockholders who exercise appraisal rights under Delaware law) that are outstanding immediately prior to the consummation of the merger (the “Merger”) will receive $0.84 in cash for each share of common stock or intrinsic value of each stock option at the time of the consummation of the Merger (the “Effective Time”). The consummation of the Merger is conditioned upon, among other things, the adoption of the Merger Agreement by the holders of a majority of the outstanding shares of our common stock ~~customary regulatory approvals~~ and other closing conditions. ~~The Merger~~As of November 4, 2005, approximately 14.0 million shares had been voted in favor of the transaction, which is ~~expected~~over 92% of the total shares voted but less than the nearly 17.2 million shares required to ~~close~~achieve a quorum to hold the meeting and approve the transaction. On November 7, 2005, we announced that in order to extend the ~~late third or fourth quarter of 2005; however, there~~period during which stockholders may submit proxies, we had adjourned our special stockholder meeting until November 11, 2005. Previously, we had adjourned our special stockholder meeting from October 12, 2005 to October 26, 2005 and again from October 26, 2005 to November 4, 2005.

is approved by the Company’s stockholders and 4) Bravo Holdco does not intend as of the date of such filing to waive any of the conditions to the closing of the Merger. The Company disagrees that any conditions to closing would not and cannot be satisfied, and believes that the parties to the Merger Agreement would be obligated to complete the Merger if it is approved by the Company’s stockholders. Following the October 12, 2005 special stockholder meeting at which a quorum was not present, the Company and Vector engaged in negotiations regarding a potential alternative transaction pursuant to which the Company would file for protection under Chapter 11 of the Bankruptcy Code, and Bravo Holdco would acquire certain assets and assume certain liabilities of the Company in a transaction pursuant to Section 363 of the Bankruptcy Code, in which case it would not be necessary to obtain the approval of the Company’s stockholders to complete the transaction. However, these negotiations did not lead to any agreement, and all proposals for such a transaction made by Vector would have resulted in the Company’s stockholders receiving an amount, if any, that is significantly less than the $0.84 per share in cash provided for in the Merger Agreement. The Company terminated these discussions on November 9, 2005 and continues to believe that the Merger remains the best available outcome for all of its stakeholders. The Company also believes that, if the Merger is not completed, the Company will likely become insolvent unless its obligations under the Notes or ~~at all.~~other significant financial obligations are significantly restructured..

On July 25, 2005, we entered into an agreement with certain of the holders of the outstanding convertible notes which we originally issued in November 2004 under which all principal and accrued interest on the notes that is outstanding at the effective date of the Merger, together with certain other amounts payable to the noteholders, will be repaid within one business day following the Effective Time of the Merger and the notes and warrants will be extinguished.

On July 28, 2005, our representatives received copies of four complaints relating to purported class action lawsuits, each filed by an alleged holder of shares of our common stock and each filed in California Superior Court for the county of San Mateo. These complaints are captioned Gary Goberville, et al., vs. Pehong Chen, et al.,Civ 448490, Cookie Schwartz, et al., vs. BroadVision, Inc., et al, Civ 448516, Leon Kotovich, et al., vs. BroadVision, Inc., et al, Civ 448518 and Anthony Noblett, et al., vs. BroadVision, Inc., et al, Civ 448519. Each claim names our directors and BroadVision, Inc. as defendants, and each alleges that the director defendants violated their fiduciary duties to stockholders by, among other things, failing to maximize our value and ignoring, or failing to adequately protect against, certain purported conflicts of interest. Each complaint seeks, among other things, injunctive relief and damages in an unspecified amount. ~~We anticipate~~On September 21, plaintiff Goberville filed an amended complaint alleging that ~~similar~~defendants caused materially misleading information regarding a proposed merger to be disseminated to the Company’s stockholders. On October 20, 2005, the Court ordered consolidation of the four pending actions ~~may~~pursuant to the parties’ stipulation. In accordance with the Court’s order, plaintiffs’ consolidated amended complaint must be filed inand served no later than December 5, 2005. In addition, defendants must complete by December 5, 2005, their production of relevant documents responsive to the ~~future against some~~first request for production of documents that were served on defendants by plaintiff Kotovich on August 9, 2005 and plaintiff Goberville on August 31, 2005.

In October 2005, we inadvertently did not make timely payment of the third quarter interest payment due under the Notes of approximately $201,000 that was due on October 1, 2005. Lack of timely payment became an event of default on October 8, 2005 after non-payment continued for a period of over five business days. We made the third quarter interest payment promptly after discovery of the nonpayment, on October 14, 2005. The event of default permits each noteholder to require us to redeem 120% of all or any portion of the amounts outstanding under the applicable Note by delivering to us notice of such redemption, which redemption is required under the Notes to be paid within five business days after receipt of such redemption notice. If all of the ~~same defendants.~~noteholders elect such redemption, we will be obligated to pay within five business days after receipt of such election approximately $15.5 million in unpaid principal and interest. The accelerated repayment of all or any significant portion of such amount would leave us with insufficient working capital to conduct its business, and we do not presently have sufficient cash to meet such an accelerated repayment obligation.

On October 25, 2005, we entered into an agreement with the noteholders under which the noteholders agreed not to require redemption of the Notes, including the 20% premium payable thereunder, prior to November 16, 2005.

have disputed whether the Company’s consent is required in connection with the purported transfer of the Notes and questioned the reasonableness of the Company’s refusal to consent, and these disputes are unresolved.

On November 8, 2005, counsel for the noteholders delivered to the Company a letter purporting to terminate the July Noteholder Agreement based on the Company’s alleged breaches of material representations, warranties or covenants by reason of the October 8, 2005 event of default and the Company’s refusal to consent to the transfer of the Notes to Vector III. Based on such purported termination, the noteholders assert that the Company’s consent to the transfer of the Notes from the noteholders to Vector III is not required and the other provisions of the July Noteholder Agreement are no longer effective. The noteholders’ letter also asserts that the Company’s refusal to consent to the transfer is a breach of the October 25, 2005 agreement with the noteholders and entitles the noteholders to recover from the Company their attorneys’ fees in connection with the alleged breaches. On November 9, 2005, Vector III notified us that it had completed its purchase of the Notes.

On November 9, 2005, the Company’s Chief Executive Officer and largest stockholder, Pehong Chen, advised the Company that he had offered to purchase the Notes from Vector III for a price equal to its cost plus an amount necessary to defray its reasonable expenses in connection with the purchase and sale of the Notes. Dr. Chen has also advised the Company’s Board of Directors that, if he becomes the owner of the Notes, he will negotiate in good faith with the Company to restructure the Notes so as to relieve the Company of any short-term liquidity threat. Pursuant to the July Noteholder Agreement, the Company’s Board of Directors has consented to the acquisition of the Notes by Dr. Chen. To the Company’s knowledge, Vector III has not accepted Dr. Chen’s offer to purchase the Notes, and there can be no assurance that Dr. Chen will acquire the Notes or that the Company’s obligations under the Notes will be restructured.

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 June 2005, we entered into a renewed and amended loan and security agreement with the lender. The agreement requires us to maintain certain levels of unrestricted cash and cash equivalents (excluding equity investments), and to maintain certain levels on deposit with the lender. At ~~June 30, 2005 and~~ December 31, 2004, ~~$15.0 million and~~ $20.0 million ~~respectively,~~ was outstanding under the line of credit. As of September 30, 2005, there was no outstanding balance on the line of 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 2006. As of July 1, 2005, under the renewed and amended agreement, the requirements we must meet in order to ~~continue to~~ access the credit facility became more ~~stringent under the renewed and amended agreement,~~stringent. We were not in compliance with these new requirements as of September 30, 2005, and we expect that ~~beginning in the third quarter of 2005 and for the foreseeable future,~~ we will be unable to meet the new ~~requirements.~~requirements in future periods. Further, due to the Company’s default under its convertible debentures described above, the term debt is also in default, and there the entire balance of $503,000 at September 30, 2005 is classified as currently due.

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.

Basis of Presentation - Going Concern Uncertainty

agreement entered into on October 25, 2005 with the convertible noteholders, the noteholders can demand payment in full on the approximate $15.5 million outstanding note balance and interest on or after November 16, 2005. If this were to occur, and if the Company was not able to obtain financing sufficient to fully repay the notes upon such demand, the Company would be forced to seek protection under the bankruptcy laws. These matters raise substantial doubt about the ability of the Company to continue in existence as a going concern. No adjustments to the carrying values or classification of the assets and liabilities in the accompanying financial statements have been made to take account of this uncertainty.

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 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 SAB 101.

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 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 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 SFAS 142 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 142, ~~we are~~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, atthe Company concluded that, as of September 30, ~~2002, we concluded that,~~2005, based on the existence of impairment indicators, including a decline in ~~our~~its market value, weit would be required to test goodwill for impairment. SFAS No. 142 provides for a ~~two-stage~~two-step approach to determining whether and by how much goodwill has been impaired. Since ~~we have~~the Company has only one reporting unit for purposes of applying SFAS No. 142, the first ~~stage~~step 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~~step must be completed to determine the amount, if any, of actual impairment. WeThe Company completed the first ~~stage~~step and has determined that ~~our fair~~its net book value at September 30, ~~2002~~2005 exceeded ~~our net book~~its fair value on that date, and as a result, nothe Company has begun the process of determining the fair values of its identifiable tangible and intangible assets and liabilities for purposes of determining the implied fair value of its goodwill and any resulting goodwill impairment. As of the date of the filing of this Form 10-Q, the Company has not completed step two of this impairment analysis due to the limited time period from the first indication of potential impairment to the date of this filing and the complexities involved in estimating the fair values of certain assets and liabilities, in particular, long-lived tangible and intangible assets (including intangible assets that have not previously been recorded in the Company’s financial statements). SFAS 142 provides that in circumstances in which step two of the impairment analysis has not been completed, a company should recognize an estimated impairment charge to the extent that a Company determines that it is probable that an impairment loss has occurred and such impairment loss can be reasonably estimated using the guidance provided in SFAS 5. Based on the foregoing, the Company has recognized a goodwill impairment charge of $13.2 million at September 30, 2005, which represents management’s preliminary estimate of the probable goodwill impairment based on the fair value analysis completed to date. The Company has used the quoted market price of the Company’s common stock (market capitalization) as a basis for determining the fair value of the reporting unit. The Company expects to complete step two of the impairment analysis during the fourth quarter of 2005 and, to the extent that the completed analysis indicates additional goodwill impairment in excess of management’s preliminary estimate, the Company will recognize such additional impairment in the fourth quarter.

Subsequent to September 30, 2005, the Company has experienced a significant decline in the trading price of its common stock and hence in the Company’s market capitalization. In applying the accounting requirements for recognizing and measuring an impairment loss under SFAS No. 142, the Company uses the quoted market price of the Company’s stock (market capitalization) as the basis for determining the fair value of the Company (the reporting unit) and then allocates the fair value of the reporting unit to all of the assets and liabilities of that unit in order to determine the implied fair value of goodwill. Because of the significant decline in the trading price and market capitalization of the Company subsequent to September 30, 2005, the Company anticipates recording a significant additional non-cash charge for the impairment of goodwill ~~was recorded~~ in the ~~consolidated financial statements. We obtained an independent appraisal~~three-month period ending December 31, 2005. The amount of the impairment charge will be determined based upon a number of factors, including the fair value ~~to support our conclusion. We also determined that our fair value exceeded our net book value as~~ of ~~June 30, 2005~~the Company’s assets and liabilities at December 31, ~~2004 and, therefore, no additional impairment was warranted.~~2005.

The process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment. In estimating ~~our~~the fair value weof the Company, the Company made estimates and judgments about future revenues and cash flows. ~~Our~~The Company’s forecasts were based on assumptions that are consistent with the plans and estimates ~~we are~~the Company is using to manage ~~our~~the business. Changes in these estimates could change ~~our~~the Company’s conclusion regarding impairment of goodwill and potentially result in a future non-cash goodwill impairment charge for all or a portion of the goodwill balance at ~~June~~September 30, 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 APB 25 and related interpretations when accounting for our stock option and stock purchase plans. In accordance with APB 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 months ended March 31, 2004, the Company recorded compensation income of $15,000 as a result of granting common stock to a third party consultant. These charges were calculated based upon the 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 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 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, unaudited):

	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004			2005			2004			2005			2004
Net income (loss) as reported	$	(2,914	)	$	(1,492	)	$	4		$	(2,359	)	$	(14,537	)	$	23,380		$	14,532		$	21,021
Add: Stock-based employee compensation (income) expense included in reported net income (loss), net of related tax effects	—			—			—			(15		)	—			—			—			(15		)
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects	(7		)	(3,487		)	(1,153		)	(5,258		)	(219		)	(1,256		)	(1,668		)	(6,020		)
Pro forma net loss	$	(2,921	)	$	(4,979	)	$	(1,149	)	$	(7,632	)	$	(14,756	)	$	22,124		$	(16,200	)	$	14,986

Income (loss) per share:
Basic—as reported	$	(0.09	)	$	(0.04	)	$	0.00		$	(0.07	)	$	(0.42	)	$	0.70		$	(0.43	)	$	0.63
Basic—pro forma	$	(0.09	)	$	(0.15	)	$	(0.03	)	$	(0.23	)	$	(0.43	)	$	0.66		$	(0.47	)	$	0.45

Diluted—as reported	$	(0.09	)	$	(0.04	)	$	0.00		$	(0.07	)	$	(0.42	)	$	0.69		$	(0.43	)	$	0.61
Diluted—pro forma	$	(0.09	)	$	(0.15	)	$	(0.03	)	$	(0.23	)	$	(0.43	)	$	0.65		$	(0.47	)	$	0.44

Restructuring Charges

Through ~~June~~September 30, 2005, we have approved 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 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 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 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 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:

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

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 ~~June~~September 30, 2005, the total restructuring accrual of ~~$11.4~~$8.0 million consisted of the following (in millions):

	Current		Non-Current		Total		Current		Non-Current		Total
Severance and Termination	$	1.1	$	—	$	1.1	$	0.7	$	—	$	0.7
Excess Facilities	3.7		6.6		10.3		5.4		1.9		7.3

Total	$	4.8	$	6.6	$	11.4	$	6.1	$	1.9	$	8.0

Years ending December 31,	Total future minimum payments		Total future minimum payments
2005	$	3.7	$	0.4
2006	4.8		5.2
2007	0.7		0.7
2008	0.5		0.6
2009 and thereafter (through October 2010)	0.6		0.4

Total minimum facilities payments	$	10.3	$	7.3

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
Three Months Ended September 30, 2005
Lease cancellations and commitments	$	3,964	$	(61	)	$	175		$	4,078
Termination payments to employees and related costs	655		443			(775		)	323
	$	4,619	$	382		$	(600	)	$	4,401
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
Nine Months Ended September 30, 2005
Lease cancellations and commitments	$	21,824	$	(838	)	$	(16,908	)	$	4,078
Termination payments to employees and related costs	365		975			(1,017		)	323
	$	22,189	$	137		$	(17,925	)	$	4,401
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, beginning		Amounts charged to restructuring costs and other			Amounts paid or written off			Accrued restructuring costs, ending		Accrued restructuring costs, beginning		Amounts charged to restructuring costs and other			Amounts paid or written off			Accrued restructuring costs, ending
Three Months Ended June 30, 2005
Three Months Ended September 30, 2005
Lease cancellations and commitments	$	8,871	$	(172	)	$	(2,373	)	$	6,326	$	6,326	$	(137	)	$	(2,930	)	$	3,259
Termination payments to employees and related costs	445		—			(23		)	422		422		—			(70		)	352
	$	9,316	$	(172	)	$	(2,396	)	$	6,748	$	6,748	$	(137	)	$	(3,000	)	$	3,611
Three Months Ended June 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
Nine Months Ended September 30, 2005
Lease cancellations and commitments	$	78,292	$	521		$	(5,620	)	$	73,193	$	11,515	$	(287	)	$	(7,969	)	$	3,259
Termination payments to employees and related costs	429		—			—			429		459		—			(107		)	352
	$	78,721	$	521		$	(5,620	)	$	73,662	$	11,974	$	(287	)	$	(8,076	)	$	3,611

Six Months Ended June 30, 2005
Nine Months Ended September 30, 2004
Lease cancellations and commitments	$	11,515	$	(150	)	$	(5,039	)	$	6,326	$	81,143	$	(33,704	)	$	(33,838	)	$	13,601
Termination payments to employees and related costs	459		—			(37		)	422		429		—			—			429
Write-off on disposal of assets and related costs											1,883		(9		)	(512		)	1,362
	$	11,974	$	(150	)	$	(5,076	)	$	6,748	$	83,455	$	(33,713	)	$	(34,350	)	$	15,392
Six Months Ended June 30, 2004
Lease cancellations and commitments	$	83,026	$	773		$	(10,606	)	$	73,193
Termination payments to employees and related costs	429		—			—			429
	$	83,455	$	773		$	(10,606	)	$	73,622

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. We 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 sublease income 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.

Legal Matters

Our 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 we can estimate the amount and range of loss. We have 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, we are unable to make a reasonable estimate of the liability that could result from the remaining pending litigation. As additional information becomes available, we will assess the potential liability related to its pending litigation and revise our estimates, if necessary. Such revisions in our estimates of the potential liability could materially impact 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~~were made in February 2005, ~~with the second made in~~ May 2005 and ~~the third due in~~ September 2005.

On July 28, 2005, our representatives ~~of the Company~~ received copies of four complaints relating to purported class action lawsuits, each filed by an alleged holder of shares of our common stock and each filed in California Superior Court for the county of San Mateo. These complaints are captioned Gary Goberville, et al., vs. Pehong Chen, et al.,Civ 448490, Cookie Schwartz, et al., vs. BroadVision, Inc., et al, Civ 448516, Leon Kotovich, et al., vs. BroadVision, Inc., et al, Civ 448518 and Anthony Noblett, et al., vs. BroadVision, Inc., et al, Civ 448519. Each claim names ~~the Company’s~~our directors and BroadVision, Inc. as defendants, and each alleges that the director defendants violated their fiduciary duties to stockholders by, among other things, failing to maximize ~~the Company’s~~our value and ignoring, or failing to adequately protect against, certain purported conflicts of interest. Each complaint seeks, among other things, injunctive relief and damages in an unspecified amount. ~~The Company anticipates~~On September 21, plaintiff Goberville filed an amended complaint alleging that ~~similar~~defendants caused materially misleading information regarding a proposed merger to be disseminated to the Company’s stockholders. On October 20, 2005, the Court ordered consolidation of the four pending actions ~~may~~pursuant to the parties’ stipulation. In accordance with the Court’s order, plaintiffs’ consolidated amended complaint must be filed inand served no later than December 5, 2005. In addition, defendants must complete by December 5, 2005, their production of relevant documents responsive to the ~~future against some or all~~first request for production of ~~the same defendants.~~documents that were served on defendants by plaintiff Kotovich on August 9, 2005 and plaintiff Goberville on August 31, 2005.

Results of Operations

Revenues

Total revenuesdecreased ~~23%~~18% during the three months ended ~~June~~September 30, 2005 to ~~$15.5~~$14.1 million as compared to ~~$20.1~~$17.2 million for the three months ended ~~June~~September 30, 2004. Total revenues decreased 22% during the ~~six~~nine months ended ~~June~~September 30, 2005 to ~~$31.9~~$46.0 million as compared to ~~$41.0~~$58.2 million for the ~~six~~nine months ended ~~June~~September 30, 2004. A summary of our revenues by geographic region is as follows (dollars in thousands, unaudited):

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

June 30, 2005
September 30, 2005
Americas	$	1,792	53	%	$	7,266	60	%	$	9,058	58	%	$	1,724	55	%	$	6,528	60	%	$	8,252	59	%
Europe	1,278		38		4,133		34		5,411		35		830		26		3,529		32		4,359		31
Asia Pacific	321		9		724		6		1,045		7		580		19		886		8		1,466		10
Total	$	3,391	100	%	$	12,123	100	%	$	15,514	100	%	$	3,134	100	%	$	10,943	100	%	$	14,077	100	%

June 30, 2004
September 30, 2004
Americas	$	2,011	28	%	$	6,840	52	%	$	8,851	44	%	$	2,111	45	%	$	7,159	57	%	$	9,270	54	%
Europe	3,817		54		5,165		40		8,982		45		1,884		41		4,250		34		6,134		36
Asia Pacific	1,269		18		1,026		8		2,295		11		659		14		1,161		9		1,820		10
Total	$	7,097	100	%	$	13,031	100	%	$	20,128	100	%	$	4,654	100	%	$	12,570	100	%	$	17,224	100	%

Six Months Ended:

June 30, 2005
Nine Months Ended:
September 30, 2005
Americas	$	3,706	48	%	$	13,990	58	%	$	17,696	55	%	$	5,430	50	%	$	20,518	59	%	$	25,948	57	%
Europe	2,984		38		8,345		35		11,329		36		3,814		35		11,874		34		15,688		34
Asia Pacific	1,117		14		1,739		7		2,856		9		1,697		15		2,625		7		4,322		9
Total	$	7,807	100	%	$	24,074	100	%	$	31,881	100	%	$	10,941	100	%	$	35,017	100	%	$	45,958	100	%

June 30, 2004
September 30, 2004
Americas	$	4,601	31	%	$	13,886	53	%	$	18,487	45	%	$	6,711	34	%	$	21,061	54	%	$	27,772	48	%
Europe	8,710		58		10,370		40		19,080		47		10,598		54		14,612		38		25,210		43
Asia Pacific	1,626		11		1,824		7		3,450		8		2,282		12		2,977		8		5,259		9
Total	$	14,937	100	%	$	26,080	100	%	$	41,017	100	%	$	19,591	100	%	$	38,650	100	%	$	58,241	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 revenuesdecreased ~~52%~~33% during the three months ended ~~June~~September 30, 2005 to ~~$3.4~~$3.1 million as compared to ~~$7.1~~$4.7 million for the three months ended ~~June~~September 30, 2004. Software license revenue decreased ~~48%~~44% during the ~~six~~nine months ended ~~June~~September 30, 2005 to ~~$7.8~~$10.9 million as compared to ~~$14.9~~$19.6 million for the ~~six~~nine months ended ~~June~~September 30, 2004. License revenue in all areas declined due to softening demand for enterprise software applications and to the selling challenges created by our deteriorating financial condition.

Services revenuesconsisting of consulting revenues, customer training revenues and maintenance revenues decreased 7%13% during the three months ended ~~June~~September 30, 2005 to ~~$12.1~~$10.9 million as compared to ~~$13.0~~$12.6 million for the three months ended ~~June~~September 30, 2004. Services revenues decreased 8%9% during the ~~six~~nine months ended ~~June~~September 30, 2005 to ~~$24.1~~$35.0 million as compared to ~~$26.1~~$38.7 million for the ~~six~~nine months ended ~~June~~September 30, 2004. The decrease in service revenues was primarily attributable to lower maintenance revenue. Maintenance revenues decreased ~~11%~~14% for the three months ended ~~June~~September 30, 2005 to ~~$7.0~~$6.5 million as compared to ~~$7.8~~$7.6 million for the three months ended ~~June~~September 30, 2004. Maintenance revenues decreased 14% for the ~~six~~nine months ended ~~June~~September 30, 2005 to ~~$13.8~~$20.3 million as compared to ~~$16.0~~$23.5 million for the ~~six~~nine months ended ~~June~~September 30, 2004. Maintenance revenue decreased due to a decline in customer licenses and 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 June 30,									Six Months Ended June 30,									Three Months Ended September 30,								Nine Months Ended September 30,
	2005			%		2004		%		2005			%		2004		%		2005		%		2004		%		2005			%		2004		%
Cost of software licenses (1)	$	(186	)	(5	)%	$	313	4	%	$	(243	)	(3	)%	$	891	6	%	$	106	3	%	$	256	6	%	$	(137	)	(1%	)	$	1,147	6	%
Cost of services (2)	5,614			46		6,302		48		11,594			48		12,579		48		5,641		52		6,391		51		17,235			49		18,970		49
Total cost of revenues (3)	$	5,428		35	%	$	6,615	33	%	$	11,351		36	%	$	13,470	33	%	$	5,747	41	%	$	6,647	39	%	$	17,098		37	%	$	20,117	35	%

(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 licensesdecreased in absolute dollar terms during the three months ended ~~June~~September 30, 2005 to ~~$(186,000)~~$106,000 as compared to ~~$313,000~~$256,000 for the three months ended ~~June~~September 30, 2004. The cost of software licenses decreased during the ~~six~~nine months ended ~~June~~September 30, 2005 to ~~$(243,000)~~$(137,000) as compared to ~~$891,000~~$1,147,000 for the ~~six~~nine months ended ~~June~~September 30, 2004. This decrease was primarily due to the reversal of some royalty costs no longer considered payable.

Cost of servicesdecreased ~~11%~~12% in absolute dollar terms during the three months ended ~~June~~September 30, 2005 to $5.6 million as compared to ~~$6.3~~$6.4 million for the three months ended ~~June~~September 30, 2004. The cost of services decreased 9% during the ~~six~~nine months ended ~~June~~September 30, 2005 to ~~$11.6~~$17.2 million as compared to ~~$12.6~~$19.0 million for the ~~six~~nine months ended ~~June~~September 30, 2004. This decline was attributable to lower consulting headcount in Europe and the Middle East regions and lower customer 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 expensesconsist 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 expensesconsist primarily of salaries, employee-related benefit costs, commissions and other incentive compensation, travel and entertainment and marketing program-related expenditures such as collateral materials, trade shows, public relations, advertising, and creative services.

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

• Restructuring chargesrepresent 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 is set forth in the following table. The percentage of expenses is calculated based on total revenues (dollars in thousands, unaudited):

	Three months ended June 30,								Six Months Ended June 30,									Three months ended September 30,									Nine Months Ended September 30,
	2005		% (1)		2004		% (1)		2005			% (1)		2004		% (1)		2005		% (1)		2004			% (1)		2005			% (1)		2004			% (1)
Research and development	$	3,955	25	%	$	4,509	22	%	$	8,242		26	%	$	9,397	23	%	$	3,095	22	%	$	4,600		27	%	$	11,337		25	%	$	13,997		24	%

Sales and marketing	5,060		33		7,480		37		10,871			34		14,346		35		2,948		21		6,020			35		13,819			30		20,365			35
General and administrative	2,829		18		2,400		12		5,364			17		4,817		12		2,162		15		2,335			13		7,526			16		7,152			12
Goodwill impairment																		13,198		94		—			—		13,198			29		—			—
Restructuring charges	309		2		679		3		(395		)	(1	)	1,249		3		245		2		(25,454		)	(142	)	(150		)	(0	)	(24,205		)	(42	)
Business combination charge																		977		7		—			—		977			2		—			—
Total operating expenses	$	12,153	78	%	$	15,068	75	%	$	24,082		76	%	$	29,809	73	%	$	22,625	161		$	(12,499	)	(73	)%	$	46,707		102	%	$	17,309		30	%

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

Research and development expensesdecreased ~~12%~~33% during the three months ended ~~June~~September 30, 2005 to ~~$4.0~~$3.1 million as compared to ~~$4.5~~$4.6 million for the three months ended ~~June~~September 30, 2004. The decrease in research and development expenses was primarily attributable to reduced headcount as a result of layoffs, natural attrition and lower overhead allocations.

Research and development decreased ~~12%~~19% during the ~~six~~nine months ended ~~June~~September 30, 2005 to ~~$8.2~~$11.3 million as compared to ~~$9.4~~$14.0 million for the ~~six~~nine months ended ~~June~~September 30, 2004. The decrease for the ~~six~~nine month period was primarily attributable to lower depreciation costs for fully depreciated assets and headcount reductions as a result of our cost-cutting efforts.

Sales and marketing expensesdecreased ~~32%~~51% during the three months ended ~~June~~September 30, 2005 to ~~$5.1~~$2.9 million as compared to ~~$7.5~~$6.0 million for the three months ended ~~June~~September 30, 2004. Sales and marketing decreased ~~24%~~32% during the ~~six~~nine months ended ~~June~~September 30, 2005 to ~~$10.9~~$13.8 million as compared to ~~$14.3~~$20.4 million for the ~~six~~nine months ended ~~June~~September 30, 2004. The decreases were primarily attributable to turnover in the sales organization combined with lower commissions on lower license revenue.

General and administrative expenses ~~increased 18%~~decreased 7% during the three months ended ~~June~~September 30, 2005 to ~~$2.8~~$2.2 million as compared to ~~$2.4~~$2.3 million for the three months ended ~~June~~September 30, 2004. General and administrative expenses increased ~~11%~~5% during the ~~six~~nine months ended ~~June~~September 30, 2005 to ~~$5.4~~$7.5 million as compared to ~~$4.8~~$7.2 million for the ~~six~~nine months ended ~~June~~September 30, 2004. The increase was primarily attributable to a ~~$562,000~~$676,000 reduction of ~~accounts receivable and~~ sales reserves in the three months ~~ended June~~September 30, 2004 compared to a reduction of ~~$100,000~~$218,000 recorded in the same period in 2005

Restructuring charges.Through ~~June~~September 30, 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 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 SAB 100.

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

	Three Months Ended June 30,					Six Months Ended June 30,					Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004		2005			2004		2005			2004			2005			2004
Facilities	$	(318	)	$	521	$	(927	)	$	773	$	(198	)	$	(26,036	)	$	(1,125	)	$	(25,263	)
Severance and other	627			158		532			476		443			582			975			1,058
Total	$	309		$	679	$	(395	)	$	1,249	$	245		$	(25,454	)	$	(150	)	$	(24,205	)

The excess facilities credit for the three and ~~six-months~~nine months ended ~~June~~September 30, 2005 related primarily to an adjustment of ~~$264,000~~$175,000 and ~~$ 1.0~~$1.2 million, respectively, to fair value of the warrant issued to a previous landlord as part of a lease settlement in 2004. The excess facilities charge for the ~~three-months~~three months ended ~~June~~September 30, 2004, primarily related to the ~~adjustment~~settlements reached between the Company and certain landlords for elimination of ~~accrued interest on excess facilities~~future lease obligations ~~that were discounted under SFAS 146.~~(see Note 6 of the Notes to Condensed Consolidated Financial Statements). The severance and termination costs for 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 5. Adjustments to the restructuring accruals will be made in future periods, if necessary, based upon the then current actual events and circumstances.

Interest (expense) income, net for the three months ended ~~June~~September 30, 2005 was an expense of ~~$1.1~~$1.0 million as compared to income of ~~$102,000~~$77,000 for the three months ended ~~June~~September 30, 2004. Interest (expense) income, net for the ~~six~~nine months ended ~~June~~September 30, 2005 was an expense of ~~$1.8~~$2.8 million as compared to income of ~~$211,000~~$288,000 for the ~~six~~nine months ended ~~June~~September 30, 2004. Interest expense increased in the three and ~~six~~nine months ended ~~June~~September 30, 2005 due to the outstanding convertible notes 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, for the three months ended ~~June~~September 30, 2005 was a net income of ~~$313,000~~$220,000 as compared to ~~expenses~~income of ~~$45,000~~$238,000 for the three months ended ~~June~~September 30, 2004. Other (expense) income, net for the ~~six~~nine months ended ~~June~~September 30, 2005 was an income of ~~$3.4~~$3.6 million as compared to ~~expense~~income of ~~$178,000~~$59,000 for the ~~six~~nine months ended ~~June~~September 30, 2004. The increase in income in the three and ~~six~~nine months ended ~~June~~September 30, 2005 was primarily due to recognition of a gain of ~~$732,000~~$523,000 and ~~$2.5~~$3.0 million, respectively, on the revaluing of common stock warrants for warrants issued in connection with the convertible note offering in November 2004 to fair value as of ~~June~~September 30, 2005, partially offset by ~~$480,000~~$320,000 and $800,000 of convertible note filing penalties

incurred in the three and nine months ended ~~June~~September 30, 2005, respectively, due to delays in achieving effectiveness of a registration statement related to the common stock underlying the notes.

Income Taxes. During the three months ended ~~June 30, 2005, we recorded a tax provision of $70,000 as compared to a tax benefit of $6,000 for three months ended June 30, 2004. During the six months ended June~~September 30, 2005, we recorded a tax benefit of ~~$2.0~~$540,000 as compared to a tax provision of $11,000 for three months ended September 30, 2004. During the nine months ended September 30, 2005, we recorded a tax benefit of $2.5 million as compared to a provision of ~~$130,000~~$141,000 during the ~~six~~nine months ended ~~June~~September 30, 2004. The tax ~~provision~~benefit for the three and nine months ended ~~June~~September 30, 2005 was primarily due to the settlement of or adjustment to income tax accruals, mostly related to foreign jurisdictions. For the three and nine months ended September 30, 2004, the tax provisions related to estimates for income taxes to be paid in our foreign jurisdictions. For the three months ended June 30, 2004, the tax benefit of $6,000 related to reversal of income tax accruals. The benefit in the six months ended June 30, 2005 related to reversal of amounts previously accrued for expected income taxes.

Liquidity and Capital Resources

Overview

Due to a combination of factors, we currently ~~anticipate~~believe that our available cash resources will ~~likely~~ be insufficient to meet our payment obligations ~~by some point~~ in the fourth quarter of ~~2005.~~2005 unless its obligations under the Notes discussed above or other significant financial obligations are significantly restructured. The factors contributing to this belief include lower-than-anticipated revenues in 2005, costs associated with the Merger and cash payment requirements under ~~our outstanding convertible notes.~~the Notes, which will be subject to potential demand for payment in full by the holder(s) thereof on and after November 16, 2005. If our cash resources become insufficient to meet our obligations as they become due, which they will if repayment of any significant portion of the Notes is demanded and may even in the absence of such a demand, our business and future prospects would be seriously harmed and our ability to operate the business and complete the merger ~~could~~would be seriously jeopardized. The Merger is subject to numerous conditions, including the approval of our stockholders, that could considerably delay or even prevent its completion, and there is no assurance that we will be able to obtain additional financing under our existing bank credit facility or otherwise. The requirements we must meet in order to obtain financing under our bank credit facility became more stringent in July 2005, and we presently anticipate being unable to meet the new requirements for the foreseeable future. In order to obtain financing from any other source, we would be required to obtain the approval of both the Vector Capital portfolio company with which we have agreed to merge (provided that the Merger Agreement remains in full force and effect) and the ~~holders of our outstanding convertible notes.~~

If the Merger is not consummated, we will be required to raise additional funds and we may be unable to do so on terms acceptable to us or at all. Our ability to obtain debt or equity funding would depend on a number of factors, including restrictive covenants contained in our current convertible note agreement and credit facilities, market conditions, our operating performance and investor interest. If adequate additional funding were not available to us, we would have insufficient working capital to continue executing our current business plan. Even if additional funding were available to us, our indebtedness and debt service obligations could continue to increase our vulnerability to general adverse economic and industry conditions, limit

our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete, and place us at a competitive disadvantage to less leveraged competitors and those with better access to capital resources.

As of June 30, 2005, cash, cash equivalents, and restricted cash and investments totaled $30.7 million, which represents a decrease of $35.4 million as compared to a balance of $66.1 million on December 31, 2004. This decrease was primarily attributable to net cash used for operations, payment of lease settlement obligations and payments of debt related obligations during the six months ended June 30, 2005.

June 30,
2005

December 31,
2004

(unaudited)

Cash and cash equivalents

$
26,839

$
41,851

Restricted cash

$
3,909

$
24,256

Working capital (deficit)

$
(24,534
)
$
(18,136
)
Working capital ratio

0.64

0.82

During the third and fourth quarters of 2004, we reached agreements with certain landlords to extinguish approximately $155.0 million of future real estate obligations. We made related cash payments of $20.7 million in 2004 and additional cash payments of $22.8 million in the first half of 2005. In addition, we issued to oneholder(s) of the ~~landlords a five-year warrant to purchase approximately 700,000 shares of~~Notes. There can be no assurance that our common stock at an exercise price of $5.00 per share, exercisable beginning in August 2005. As a 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 $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, discounted to net present value, is accounted for in accordance with SFAS 146 and is part of the non-current restructuring accrual of $6.6 million as of June 30, 2005.

In November 2004, we entered into a definitive agreement for the private placement of up to $20.0 million of convertible notes to five institutional investors. We issued an initial $16.0 million of convertible notes which are convertible, at the holders’ option, into common stock at a conversion price of $2.76 per share. The notes bear interest at a rate of six percent per annum, and we were originally obligated to repay the principal amount of the initial $16.0 million of notes in 15 equal monthly installments of $1.1 million, which began in June 2005. Under the terms of the notes, the monthly principal repayment obligation will increase to $2.1 million beginning in September 2005 due to our cash balances falling below certain defined levels as of June 30, 2005. This increase has the effect of requiring us to repay the principal amount in nine installments through April 2006. Payments of principal and interest may be made in either cash or, upon satisfaction of various conditions set forth in the notes, shares of our common stock. However, we anticipate having to use cash to satisfy all of our payment obligations under the ~~notes.~~

On May 9, 2005, by agreement between us and the holders of a majority of the notes, one of the agreements governing the notes 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 notes. Unexpected delays in obtaining effectiveness of the SEC registration statement relating to the notes are causing us to incur additional penalty payments to the note holders at a rate of $160,000 per month and to make principal, interest and penalty payments in cash rather than common stock.

The convertible notes allow the noteholders to require redemption of the notes upon the occurrence of various events of default, such as : 1) the termination of trading of our common stock on the Nasdaq National Market, 2) specified change of control transactions,Notes or 3) the failure of the registration statement required to be filed pursuant to the Registration Rights Agreement to be declared effective by the SEC on or before May 9, 2005. On May 9, 2005, we and the noteholders amended the Registration Rights Agreement to extend the deadline to September 6, 2005 although as described above, we are making penalty payments to the noteholders at a rate of $160,000 per month, which payments will continue until such time as the required registration statement is declared effective by the SEC. Some of the events of defaults include matters over which we may have some, little or no control. Many other events of default are described in the agreements we executed when we issued the convertible notes. In such a situation, if an event of default occurs, we may be required to redeem all or part of the convertible notes including payment of applicable interest and penalties. These payments must be made within 5 business days of receipt of a notice of redemption. We may have insufficient funds to redeem the convertible notes when and if required, and any such redemption, if made, could leave us with little or no working capital for our business. We have not established a sinking fund for payment of our outstanding convertible notes, nor do we anticipate doing so. Under an agreement we entered into with certain of the noteholders on July 25, 2005, the noteholders have consented to the completion of the Merger, subject to our performance of our payment and othersignificant financial obligations ~~under the agreement.~~

On June 29, 2005, our Board of Directors approved a business restructuring plan, primarily consisting of headcount reductions, designed to adjust expenses to a level more consistent with anticipated revenues. The reduction of approximately 63 employees, or 22% of our workforce, is expected to be completed by the end of the third quarter of 2005. We expect that it will incur pre-tax severance costs of approximately $1.3 million, of which approximately $665,000 was incurred in the second quarter of 2005 and $600,000 is expected to be incurred in the third quarter of 2005.

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 June 2005, we entered into a renewed and amended loan and security agreement with the lender. The agreement requires us to maintain certain levels of unrestricted cash and cash equivalents (excluding equity investments), and to maintain certain levels on deposit with the lender. At June 30, 2005 and December 31, 2004, $15.0 million and $20.0 million, respectively, was outstanding under the line of 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 2006. The requirements we must meet in order to continue to access the credit facility became more stringent under the renewed and amended agreement, and we expect that, beginning in the third quarter of 2005 and for the foreseeable future, we will be ~~unable to meet the new requirements.~~

Commitments totaling $3.9 million and $24.3 million in the form of standby letters of credit were issued on our behalf from financial institutions as of June 30, 2005 and December 31, 2004, respectively, primarily in favor of our various landlords to secure obligations under our facility leases. Accordingly, $3.9 million and $24.3 million have been presented as restricted cash in the accompanying Condensed Consolidated Balance Sheets at June 30, 2005 and December 31, 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 June 30, 2005 and December 31, 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 six months ended June 30, 2005 and 2004.

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

Cash used for operating activities was $30.2 million for the six months ended June 30, 2005. The primary reason for the net cash used by operating activities was due to the payment of accrued liabilities related to restructuring of $22.2 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 $1.1 million, the non-cash release of income tax reserves of $2.0 million, and the gain on revaluation of warrants to fair value of $3.5 million. Cash used for operating activities was $9.8 million for the six months ended June 30, 2004. This use of cash was primarily due to the net loss of $2.4 million and decreases in accrued expenses and non-current liabilities, primarily related to excess facilities costs. Partially offsetting these uses of cash were $2.3 million of non-cash depreciation and amortization expense and a decrease in accounts receivable of $3.4 million due to reduced revenue.

~~Cash Provided By (Used For) Investing Activities~~

Cash provided by investing activities was $21.0 million for the six months ended June 30, 2005 and was primarily due to transfers from restricted cash of $19.7 million and proceeds from dividends of $1.1 million. Cash used by investing activities was $2.9 million for the six months ended June 30, 2004 and was primarily due to transfers to restricted cash. Capital expenditures were $108,000 and $318,000 during the six months ended June 30, 2005 and 2004, respectively. Our capital expenditures consisted of purchases of operating resources to manage our operations and consisted primarily of computer hardware and software.

~~Cash Provided By (Used For) Financing Activities~~

Cash used for financing activities was $6.0 million for the six months ended June 30, 2005, consisting of $6.5 million used for repayment of borrowings, net of new borrowings, offset by $522,000 funds received for the issuance of common stock. Cash provided by financing activities was $769,000 for the six months ended June 30, 2004, consisting of $1.2 million in proceeds from the issuance of common stock and $416,000 for repayment of borrowings, net 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 June 30, 2005, under noncancelable operating lease agreements, is as follows (in millions):

Years Ending December 31,

Total future
minimum
payments

2005

$
2.4

2006

3.1

2007

4.2

2008

2.1

2009 and thereafter

6.3

Total minimum lease payments

$
18.1

~~See Note 6 of Notes to Condensed Consolidated Financial Statements for information about additional payments due under previously negotiated lease buyout transactions.~~

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 millions):

Less than 1 year

$
1.9

1-3 years

1.0

4-5 years

—

Over 5 years

1.0

Total

$
3.9

~~Restricted cash represents collateral for these letters of credit.~~

Factors That May Affect Future Operating Results

Due to a combination of factors, we currently anticipate that our available cash resources will likely be insufficient to meet our payment obligations by some point in the fourth quarter of 2005. The factors contributing to this belief include lower-than-anticipated revenues in 2005, costs associated with the Merger and cash payment requirements under our outstanding convertible notes. If our cash resources become insufficient to meet our obligations as they become due, our business and future prospects would be seriously harmed and our ability to operate the business and complete the merger could be jeopardized. The Merger is subject to numerous conditions, including the approval of our stockholders, that could considerably delay or even prevent its completion, and there is no assurance that we will be able to obtain additional financing under our existing bank credit facility or otherwise. The requirements we must meet in order to obtain financing under our bank credit facility became more stringent in July 2005, and we presently anticipate being unable to meet the new requirements for the foreseeable future. In order to obtain financing from any other source, we would be required to obtain the approval of both the Vector Capital portfolio company with which we have agreed to merge and the holders of our outstanding convertible notes.restructured.

If the Merger is not consummated, we will be required to raise additional funds, and we may be unable to do so on terms acceptable to us or at all. Our ability to obtain debt or equity funding would depend on a number of factors, including restrictive covenants contained in our current convertible note agreement and credit facilities, market conditions, our operating performance and investor interest. If adequate additional funding were not available to us, we would have insufficient working capital to continue executing our current business plan. Even if additional funding were available to us, our indebtedness and debt service obligations could continue to increase our vulnerability to general adverse economic and industry conditions, limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete, and place us at a competitive disadvantage to less leveraged competitors and those with better access to capital resources.

3336

~~The convertible notes allow~~As of September 30, 2005, cash, cash equivalents, and restricted cash and investments totaled $8.1 million, which represents a decrease of $58.0 million as compared to a balance of $66.1 million on December 31, 2004. This decrease was primarily attributable to net cash used for operations, payment of lease settlement obligations and payments of debt related obligations during the ~~noteholders~~nine months ended September 30, 2005.

	September 30, 2005			December 31, 2004
	(unaudited)
Cash and cash equivalents	$	6,066		$	41,851
Restricted cash	$	1,997		$	24,256
Working capital (deficit)	$	(30,160	)	$	(18,136	)
Working capital ratio	0.38			0.82

During the third and fourth quarters of 2004, we reached agreements with certain landlords to ~~require redemption~~extinguish approximately $155.0 million of future real estate obligations. We made related cash payments of $20.7 million in 2004 and $23.1 million in the first nine months of 2005. In addition, we issued to one of the ~~notes upon the occurrence of various events of default, such as : 1) the termination of trading~~landlords a five-year warrant to purchase approximately 700,000 shares of our common stock ~~on the Nasdaq National Market, 2) specified change~~at an exercise price of ~~control transactions, or 3) the failure~~$5.00 per share, exercisable beginning in August 2005. As a component of the ~~registration statement~~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 $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, discounted to net present value, is accounted for in accordance with SFAS 146 and is part of the non-current restructuring accrual as of September 30, 2005.

In November 2004, we entered into a definitive agreement for the private placement of up to $20.0 million of convertible notes to five institutional investors. Under the terms of the definitive agreement, we issued an initial $16.0 million of convertible notes which are convertible, at the holders’ option, into common stock at a conversion price of $2.76 per share. The notes bear interest at a rate of six percent per annum, and we were originally obligated to repay the principal amount of the initial $16.0 million of notes in 15 equal monthly installments of $1.1 million, which began in June 2005. Under the terms of the notes, the holders have the right to increase the Company’s monthly principal repayment obligation to $2.1 million as of December 2005 due to our cash balances falling below certain defined levels as of September 30, 2005. This increase, if invoked, would have the effect of requiring us to repay the principal amount in nine installments through June 2006. Certain principal payments that were due in the quarter ended September 30, 2005, have been deferred at the election of the investors for a period of eighteen months under the terms of the notes. Payments of future principal and interest may be made in either cash or, upon satisfaction of various conditions set forth in the notes, shares of our common stock. However, we currently have not satisfied the conditions required to ~~be filed pursuant~~make payments in stock, and we anticipate having to use cash to satisfy our future payment obligations under the ~~Registration Rights Agreement to be declared effective by the SEC on or before May 9, 2005.~~ notes.

On May 9, 2005, weby agreement between us and the ~~noteholders~~holders of a majority of the notes, one of the agreements governing the notes was amended ~~the Registration Rights Agreement~~ to extend by 120 days the ~~deadline to September 6, 2005 although as described above,~~time within which we are ~~making~~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 notes. Unexpected delays in obtaining effectiveness of the SEC registration statement relating to the notes caused us to incur additional penalty payments to the ~~noteholders~~note holders at a rate of $160,000 per month ~~which~~through August 2005 and to make principal, interest and penalty payments ~~will continue until such time as the required registration statement is declared effective by the SEC. Some~~in cash rather than common stock.

In October 2005, we inadvertently did not make timely payment of the ~~events~~third quarter interest payment due under the Notes of ~~defaults include matters over which we may have some, little or no control. Many other events~~approximately $201,000 that was due on October 1, 2005. Lack of ~~default are described in the agreements we executed when we issued the convertible notes. In such a situation, if~~timely payment became an event of default ~~occurs, we may be required~~on October 8, 2005 after non-payment continued for a period of over five business days. We made the third quarter interest payment promptly after discovery of the nonpayment, on October 14, 2005. The event of default permits each noteholder to require us to redeem 120% of all or ~~part~~any portion of the ~~convertible notes including payment~~amounts outstanding under the applicable Note by delivering to us notice of ~~applicable interest and penalties. These payments must~~such redemption, which redemption is required under the Notes to be ~~made~~paid within 5five business days ofafter receipt of ~~a notice of redemption. We may have insufficient funds to redeem the convertible notes when and if required, and any~~ such redemption ~~if made, could~~notice. If all of the noteholders elect such redemption, we will be obligated to pay within five business days after receipt of such election approximately $15.5 million in unpaid principal and interest. The accelerated repayment of all or any significant portion of such amount would leave us with ~~little or no~~insufficient working capital ~~for our business. We~~to conduct its business, and we do not presently have ~~not established a sinking fund for payment of our outstanding convertible notes, nor do we anticipate doing so. Under~~sufficient cash to meet such an ~~agreement~~accelerated repayment obligation.

On October 25, 2005, we entered into an agreement with ~~certain~~the noteholders under which the noteholders agreed not to require redemption of the ~~noteholders on July 25,~~Notes, including the 20% premium payable thereunder, prior to November 16, 2005.

On June 29, 2005, ~~the noteholders have consented~~our Board of Directors approved a business restructuring plan, primarily consisting of headcount reductions, designed to ~~the completion of the Merger, subject~~adjust expenses to ~~our performance~~a level more consistent with anticipated revenues. The reduction included approximately 63 employees, or 22% of our ~~payment~~workforce. We recorded severance charges of approximately $443,000 and ~~other~~$627,000 in the three-month periods ended September 30, 2005 and June 30, 2005, respectively.

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 June 2005, we entered into a renewed and amended loan and security agreement with the lender. The agreement requires us to maintain certain levels of unrestricted cash and cash equivalents (excluding equity investments), and to maintain certain levels on deposit with the lender. At December 31, 2004, $20.0 million, was outstanding under the line of credit. As of September 30, 2005, there was no outstanding balance on the line of 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 2006. Interest is due monthly and principal is due at the expiration in February 2006. As of July 1, 2005, under the renewed and amended agreement, the requirements we must meet in order to continue to access the credit facility became more stringent. We were not in compliance with these new requirements as of September 30, 2005, and we expect that we will be unable to meet the new requirements in future periods.

Commitments totaling $2.0 million and $24.3 million in the form of standby letters of credit were issued on our behalf from financial institutions as of September 30, 2005 and December 31, 2004, respectively, primarily in favor of our various landlords to secure obligations under our facility leases. Accordingly, $2.0 million and $24.3 million have been presented as restricted cash in the ~~agreement.~~accompanying Condensed Consolidated Balance Sheets at September 30, 2005 and December 31, 2004, respectively.

Our ~~net future cash flows will depend heavily on the level~~exposure to market risk for changes in interest rates relates primarily to our investment portfolio. We had no derivative financial instruments as of ~~future revenues,~~September 30, 2005 and December 31, 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, 2005 and 2004.

Cash Provided By (Used For) Operating Activities

Cash used for operating activities was $34.7 million for the nine months ended September 30, 2005. The primary reason for the net cash used by operating activities was due to the net loss for the period as well as the payment of accrued liabilities related to restructuring of $24.2 million. Other significant adjustments to reconcile net income to cash used for operating activities included the non-cash impairment of goodwill of $13.2 million, the gain on sale of cost method investments of $1.1 million, the non-cash release of income tax reserves of $2.0 million, and the gain on revaluation of warrants to fair value of $4.2 million.

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 to the net loss of $3.5 million (before extraordinary gains related to real estate transactions) and changes in balance sheet accounts related to the settlement of long term lease obligations. The accrued liabilities related to restructuring costs for excess leased facilities decreased from $104.7 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 million due to reduced revenues, offset by a decrease in unearned revenue and deferred maintenance of $6.1 million.

Cash Provided By (Used For) Investing Activities

Cash provided by investing activities was $21.9 million for the nine months ended September 30, 2005 and was primarily due to transfers from restricted cash of $20.3 million and proceeds from dividends of $1.1 million. Cash used for investing activities was $0.9 million for the nine months ended September 30, 2004 and was primarily due to transfers to restricted cash. Capital expenditures were $132,000 and $489,000 during the nine months ended September 30, 2005 and 2004, respectively. Our capital expenditures consisted of purchases of operating resources to manage our operations and consisted primarily of computer hardware and software.

Cash Provided By (Used For) Financing Activities

Cash used for financing activities was $23.0 million for the nine months ended September 30, 2005, consisting of $20.5 million used for repayment of borrowings, net of new borrowings, offset by $598,000 funds received for the issuance of common stock. Net cash used in financing activities was $11.1 million for the nine months ended September 30, 2004, consisting of $1.6 million in proceeds from the issuance of common stock and $12.7 million used for repayment of borrowings, net 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 ~~use~~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, 2005, under noncancelable operating lease agreements, is as follows (in millions):

Years Ending December 31,	Operating Leases
2005	$	1.2
2006	3.2
2007	4.2
2008	2.1
2009 and thereafter	6.2
Total minimum lease payments	$		16.9

See Note 6 of Notes to Condensed Consolidated Financial Statements for information about additional payments due under previously negotiated lease buyout transactions.

Restricted cash represents collateral for letters of credit, all of which are due to mature within one year.

Factors That May Affect Future Operating Results

Due to a combination of factors, we currently believe that our available cash resources will be insufficient to meet our payment obligations in the fourth quarter of 2005 unless our obligations under the Notes discussed above or other significant financial obligations are significantly restructured. The factors contributing to this belief include lower-than-anticipated revenues in 2005, costs associated with the Merger and cash payment requirements under the Notes, which will be subject to potential demand for payment ~~under~~in full by the ~~notes,~~holder(s) thereof on and after November 16, 2005. If our ~~ability~~cash resources become insufficient to ~~restructure operations successfully~~meet our obligations as they become due, which they will if repayment of any significant portion of the Notes is demanded and may even in the absence of such a demand, our business and future prospects would be seriously harmed and our ability to ~~manage infrastructure costs.~~operate the business and complete the merger could be jeopardized. The Merger is subject to numerous conditions, including the approval of our stockholders, that could considerably delay or even prevent its completion, and there is no assurance that we will be able to obtain additional financing under our existing bank credit facility or otherwise. The requirements we must meet in order to obtain financing under our bank credit facility became more stringent in July 2005, and we presently anticipate being unable to meet the new requirements for the foreseeable future. In order to obtain financing from any other source, we would be required to obtain the approval of both the Vector Capital portfolio company with which we have agreed to merge (provided that the Merger Agreement remains in full force and effect) and the holder(s) of the Notes. There can be no assurance that our obligations under the Notes or other significant financial obligations will be restructured.

funding were available to us, our indebtedness and debt service obligations could continue to increase our vulnerability to general adverse economic and industry conditions, limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete, and place us at a competitive disadvantage to less leveraged competitors and those with better access to capital resources.

In October 2005, we inadvertently did not make timely payment of the third quarter interest payment due under the Notes of approximately $201,000 that was due on October 1, 2005. Lack of timely payment became an event of default on October 8, 2005 after non-payment continued for a period of over five business days. We made the third quarter interest payment promptly after discovery of the nonpayment, on October 14, 2005. The event of default permits each noteholder to require us to redeem 120% of all or any portion of the amounts outstanding under the applicable Note by delivering to us notice of such redemption, which redemption is required under the Notes to be paid within five business days after receipt of such redemption notice. If all of the noteholders elect such redemption, we will be obligated to pay within five business days after receipt of such election approximately $15.5 million in unpaid principal and interest. The accelerated repayment of all or any significant portion of such amount would leave us with insufficient working capital to conduct its business, and we do not presently have sufficient cash to meet such an accelerated repayment obligation.

On July 28, 2005, our representatives ~~of ours~~ received copies of four complaints relating to purported class action lawsuits, each filed by an alleged holder of shares of our common stock and each filed in California Superior Court for the county of San Mateo. These complaints are captioned Gary Goberville, et al., vs. Pehong Chen, et al.,Civ 448490, Cookie Schwartz, et al., vs. BroadVision, Inc., et al, Civ 448516, Leon Kotovich, et al., vs. BroadVision, Inc., et al, Civ 448518 and Anthony Noblett, et al., vs. BroadVision, Inc., et al, Civ 448519. Each claim names our directors and BroadVision, Inc. as defendants, and each alleges that the director defendants violated their fiduciary duties to ~~our~~ stockholders by, among other things, failing to maximize our value and ignoring, or failing to adequately protect against, certain purported conflicts of interest. Each complaint seeks, among other things, injunctive relief and damages in an unspecified amount. We anticipate that similar actions may be filed in the future against some or all of the same defendants. ~~This litigation, as well as any other securities class-action litigation that might be initiated against us, could result in substantial costs~~

Our net future cash flows will depend heavily on the level of future revenues, the amount of cash we are required to use for payment under the notes, our ability to restructure operations successfully and ~~a diversion of management’s attention and resources.~~our ability to manage infrastructure costs.

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, 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, 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 revolving credit facility during the June 2005. The facility is secured by substantially all of our owned assets. The primary financial covenant under the 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 the bank may, among other things, accelerate the payment of the facility. As of July 1, 2005, under the renewed and amended agreement, the requirements we must meet in order to continue to access the credit facility became more ~~stringent under the renewed and amended agreement,~~stringent. We were not in compliance with these new requirements as of September 30, 2005, and we expect that ~~beginning in the third~~

~~quarter of 2005 and for the foreseeable future,~~ we will be unable to meet the new ~~requirements.~~requirements in future periods.

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.

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~~Due to our restructuring efforts and other significant recent events, we have experienced difficulties in retaining our staff. Specifically, in the ~~Unites States~~quarter ended September 30, 2005, the Company’s General Counsel and Director of ~~America~~Accounting resigned, and ~~global economy. If~~neither position has subsequently been filled. These or other staffing changes may impact our ability to prevent or detect material misstatements in or omissions from our financial statements or to perform the ~~economic environment continues~~work necessary to ~~decline or if~~obtain the ~~current global slowdown worsens or becomes prolonged,~~auditors’ attestation report on our ~~future results may be significantly impacted. We believe that the current economic decline has increased the average length~~management’s assessment of our ~~sales cycle and~~internal control over financial reporting required by SEC regulations issued pursuant to Section 404 of the Sarbanes-Oxley Act of 2002. If we are unable to obtain the auditors’ attestation report that is required to be included in our ~~operating results could suffer and our stock price could decline if~~Annual Report on Form 10-K for the year ended December 31, 2005, we ~~do not achieve the level of revenues we expect. Financial comparisons discussed herein may not~~will be ~~indicative of future performance.~~unable to file a 10-K that conforms to SEC requirements, which would be a basis for delisting from Nasdaq in addition to potential adverse consequences under SEC regulations.

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 ~~June~~September 30, 2005 and December 31, 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 ~~June~~September 30, 2005 and 2004.

During the three months ended ~~June~~September 30, 2005 we ~~drew down $15.0 million~~did not borrow any funds on our revolving line of credit. Interest is payable monthly at the bank’s prime rate with a floor minimum of 4.25% ~~(6.0%~~(6.75% annually as of ~~June~~September 30, 2005) and any outstanding principal is due in full in February 2006. Additionally, we have two outstanding term loans and an equipment line of credit as of ~~June~~September 30, 2005. Interest on those loans are at the bank’s prime rate ~~(6.0%~~(6.75% as of ~~June~~September 30, 2005) and prime rate plus 1.25%.

Cash and Cash Equivalents

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.

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

	Fair value		Fair value
Cash and certificates of deposits	$	27,263	$	6,556
Money market	3,485		1,507
Total cash and equivalents	$	30,748	$	8,063

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

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

	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 of $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, and trade accounts receivable. We maintain our cash and cash equivalents with 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 six months ended ~~June~~September 30, 2005, no one customer accounted for more than 10% of total revenue or accounts receivable.

Fair Value of Financial Instruments

Our financial instruments consist of cash equivalents, accounts receivable, 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, 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.

We had no long-term equity investments in public and non-public companies as of ~~June~~September 30, 2005. There were not any “other than temporary write-down” during the three and six months ended ~~June~~September 30, 2005 related to long-term equity investments.

~~ITEM~~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 ~~June~~September 30, 2005, the end of the period covered by this report.

Changes in Internal Control over Financial Reporting

We reported three material weaknesses as of December 31, 2004 in our annual report on Form 10-K. During the ~~six~~nine months ended ~~June~~September 30, 2005, in part to remediate those weaknesses, we implemented the following changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We:

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

• made significant 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;

• 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.

We believe that the corrective steps taken above have sufficiently remediated these material weaknesses. However, the market for skilled accounting personnel is competitive, and due to the restructuring efforts ~~as of June 30, 2005~~ and ~~the~~other significant recent events, we ~~may~~ have ~~difficulty~~experienced difficulties in retaining our staff. ~~Our inability to staff~~Specifically, in the ~~department with competent personnel with sufficient training~~quarter ended September 30, 2005, the Company’s General Counsel and Director of Accounting resigned, and neither position has subsequently been filled. Although we believe previously-identified material weaknesses have been remediated, these or other staffing changes may ~~affect~~impact our ~~internal controls over financial reporting to the extent that we may not be able~~ability to prevent or detect material ~~misstatements.~~misstatements or omissions or to perform the work necessary to obtain the auditors’ attestation report on our management’s assessment of our internal control over financial reporting required by SEC regulations issued pursuant to Section 404 of the Sarbanes-Oxley Act of 2002. If we are unable to obtain the auditors’ attestation report that is required to be included in our Annual Report on Form 10-K for the year ended December 31, 2005, we will be unable to file a 10-K that conforms to SEC requirements, which would be a basis for delisting from Nasdaq in addition to potential adverse consequences under SEC regulations.

Limitations on the Effectiveness of Controls

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.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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~~were made in February 2005, ~~the second was made in~~ May 2005 and ~~the third is due in~~ September 2005.

BroadVision, Inc. as defendants, and each alleges that the director defendants violated their fiduciary duties to stockholders by, among other things, failing to maximize ~~the Company’s~~our value and ignoring, or failing to adequately protect against, certain purported conflicts of interest. Each complaint seeks, among other things, injunctive relief and damages in an unspecified amount. ~~The Company anticipates~~On September 21, plaintiff Goberville filed an amended complaint alleging that ~~similar~~defendants caused materially misleading information regarding a proposed merger to be disseminated to the Company’s stockholders. On October 20, 2005, the Court ordered consolidation of the four pending actions ~~may~~pursuant to the parties’ stipulation. In accordance with the Court’s order, plaintiffs’ consolidated amended complaint must be filed inand served no later than December 5, 2005. In addition, defendants must complete by December 5, 2005, their production of relevant documents responsive to the ~~future against some or all~~first request for production of ~~the same defendants.~~documents that were served on defendants by plaintiff Kotovich on August 9, 2005 and plaintiff Goberville on August 31, 2005.

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.

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

~~(a)~~ ~~The Annual Meeting of Stockholders of the Company was held on May 24, 2005.~~None

~~(b)~~ ~~Pehong Chen, David L. Anderson, James D. Dixon, Robert Lee, Roderick C. McGeary, and T. Michael Nevens were elected as Directors.~~

~~(c)~~ ~~The matters voted upon and the voting of stockholders with respect thereto are as follows:~~

~~i. Election of Directors~~

For

Withheld

Pehong Chen

18,073,844

500,957

David L. Anderson

18,100,129

474,672

James D. Dixon

18,130,047

444,754

Robert Lee

18,104,607

470,194

Roderick C. McGeary

18,123,388

451,413

T. Michael Nevens

18,130,531

444,270

~~ii.~~ To approve the issuance of shares of common stock (i) upon the conversion of convertible notes and the exercise of warrants issued and issuable pursuant to a private financing completed in November 2004 and (ii) in satisfaction of certain principal and interest payment obligations under such convertible notes.

For:

10,009,779

Against:

541,103

Abstain:

144,441

Not Voted:

7,879,479

~~iii.~~ To approve an amendment to the Company’s Amended and Restated Certificate of Incorporation to reduce (i) the total authorized number of shares from 2,010,000,000 to 223,333,334 shares, (ii) the authorized number of shares of common stock from 2,000,000,000 to 222,222,223 and (iii) the authorized number of shares of preferred stock from 10,000,000 to 1,111,112.

For:

10,102,068

Against:

484,308

Abstain:

108,947

Not Voted:

7,879,479

This proposal required the approval by stockholders holding a majority of the outstanding shares of Common Stock. Shares indicated as Not Voted represent shares held in street name by banks and brokerage firms that were not voted by the firms because they had not received direction from the beneficial holders on how to vote the shares. On this matter, brokerage firms do not have discretion to vote the shares absent direction for the beneficial owners. As a result of the shares not voted, the proposal failed.

~~iv. To ratify the selection by the Audit Committee of the Board of Directors of BDO Seidman, LLP as independent auditors of the Company for its fiscal year ending December 31, 2005.~~

For:

18,127,244

Against:

316,316

Abstain:

131,242

Item 5. Other Information

~~Not applicable.~~

(a) The information provided in Note 1, “Organization and Summary of Significant Accounting Policies—Convertible Note Agreements,” of the Notes to Condensed Consolidated Financial Statements is hereby incorporated by reference.

Item 6. Exhibits

(a) Exhibits

Exhibits		Description
3.1 (1)		Amended and Restated Certificate of Incorporation.
3.2 (2)		Certificate of Amendment of Certificate of Incorporation.
3.3 (3)		Amended and Restated Bylaws.
4.1 (1)		References are hereby made to Exhibits 3.1 to 3.2
~~10.1 (4)~~		~~Ninth Amendment to the Amended and Restated Loan and Security Agreement between the Company and Silicon Valley Bank, dated June 28, 2005.~~
~~10.2~~		~~Form of Participation Agreement executed pursuant to the BroadVision, Inc. Change in Control Severance Benefit Plan by Eligible Employees, including Pehong Chen, William Meyer, and Alex Kormushoff.~~
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.

(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 July 5, 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: ~~August 9,~~November 14, 2005	By:	/s/ Pehong Chen
		Pehong Chen
		Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer)

Date: ~~August 9,~~November 14, 2005	By:	/s/ William E. Meyer
		William E. Meyer
			Executive Vice President and Chief Financial Officer (Principal Financial Officer)

	June 30, 2005			December 31, 2004
	(unaudited)
Convertible notes, 6% coupon, due in various maturities beginning in June 2005	$	12,473		$	11,982
Bank borrowings	15,000			20,000
Term debt	616			1,027

	28,089			33,009
Less: Current portion of long-term debt	(27,927		)	(25,566		)

Long-term debt, net of current portion	$	162		$	7,443

Less than 1 year	$	1.9
1-3 years	1.0
4-5 years	—
Over 5 years	1.0
Total	$	3.9

	For	Withheld
Pehong Chen	18,073,844	500,957
David L. Anderson	18,100,129	474,672
James D. Dixon	18,130,047	444,754
Robert Lee	18,104,607	470,194
Roderick C. McGeary	18,123,388	451,413
T. Michael Nevens	18,130,531	444,270

For:	10,009,779	Against:	541,103

Abstain:	144,441	Not Voted:	7,879,479

For:	10,102,068	Against:	484,308

Abstain:	108,947	Not Voted:	7,879,479