UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

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

For the Quarter ended September 30, 2006

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

BROADVISION, INC.

(Exact name of registrant as specified in its charter)

Delaware		94-3184303
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		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 þ       No o

Indicate by check mark whether the registrant is large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o       Accelerated filer o Non-accelerated filer þ

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

As of November 30, 2006 there were 69,791,281 shares of the Registrant’s Common Stock issued and outstanding.

 

 

BROADVISION, INC. AND SUBSIDIARIES
FORM 10-Q
Quarter Ended September 30, 2006

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements			3
Condensed Consolidated Balance Sheets at September 30, 2006 (unaudited) and December 31, 2005			3
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) – For the three and nine months ended September 30, 2006 and 2005 (unaudited)			4
Condensed Consolidated Statements of Cash Flows – For the nine months ended September 30, 2006 and 2005 (unaudited)			5
Notes to Condensed Consolidated Financial Statements (unaudited)			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			20
Item 3. Quantitative and Qualitative Disclosures About Market Risk			32
Item 4. Controls and Procedures			32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			33
Item 1A. Risk Factors			34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			41
Item 3. Defaults In Senior Securities			41
Item 4. Submission of Matters to a Vote of Security Holders			41
Item 5. Other Information			42
Item 6. Exhibits			42
SIGNATURES			43
EXHIBIT 31.1
EXHIBIT 32.1

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

BROADVISION, INC. AND SUBSIDIARIES

		September 30,				December 31,
		2006				2005
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	16,904			$	4,849
Accounts receivable, less allowance for doubtful accounts of $1,190 as of September 30, 2006 and $731 as of December 31, 2005			6,882				12,640
Prepaids and other			2,014				1,914
Total current assets			25,800				19,403
Property and equipment, net			1,390				2,334
Restricted cash			1,997				1,997
Goodwill			25,066				25,066
Other assets			1,043				1,142
Total assets		$	55,296			$	49,942
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable		$	2,103			$	4,396
Accrued expenses			11,951				16,090
Warrant liability			980				277
Unearned revenue			2,186				2,678
Deferred maintenance revenue			12,696				10,910
Current portion of bank borrowings			—				389
Current portion of convertible notes due to a related party			—				20,535
Total current liabilities			29,916				55,275
Other non-current liabilities			5,702				4,390
Total liabilities			35,618				59,665
Commitments and contingencies
Stockholders’ equity (deficit):
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; 69,503 shares issued and outstanding as of September 30, 2006 and 34,522 shares issued and outstanding as of December 31, 2005			7				3
Additional paid-in capital			1,236,580				1,215,256
Accumulated other comprehensive income			169				93
Accumulated deficit			(1,217,078	)			(1,225,075	)
Total stockholders’ equity (deficit)			19,678				(9,723	)
Total liabilities and stockholders’ equity (deficit)		$	55,296			$	49,942

See Accompanying Notes to Condensed Consolidated Financial Statements

BROADVISION, INC. AND SUBSIDIARIES

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2006				2005				2006				2005
						(restated)								(restated)
Revenues:
Software licenses		$	4,750			$	3,134			$	11,259			$	10,941
Services			8,835				10,943				27,679				35,017
Total revenues			13,585				14,077				38,938				45,958
Cost of revenues:
Cost of software licenses			22				106				226				(137	)
Cost of services			2,729				5,641				10,283				17,235
Total cost of revenues			2,751				5,747				10,509				17,098
Gross Margin			10,834				8,330				28,429				28,860
Operating expenses:
Research and development			2,766				3,095				7,802				11,336
Sales and marketing			1,761				2,948				6,124				13,819
General and administrative			2,429				2,162				7,406				7,526
Business combination costs			—				977				—				977
Restructuring (credit) charge			(1,878	)			246				(1,403	)			(149	)
Goodwill impairment			—				13,198				—				13,198
Total operating expenses			5,078				22,626				19,929				46,707
Operating income (loss)			5,756				(14,296	)			8,500				(17,847	)
Interest (expense) income, net			225				(778	)			457				(1,054	)
Amortization of discount on convertible notes			—				(1,295	)			—				(5,273	)
(Loss) gain on revaluation of warrants and change in value of derivatives			(317	)			794				(703	)			11,042
Other (expense) income, net			(71	)			(478	)			191				(564	)
Income (loss) before provision for income taxes			5,593				(16,053	)			8,445				(13,696	)
(Provision) benefit for income taxes			(228	)			541				(449	)			2,502
Net income (loss)		$	5,365			$	(15,512	)		$	7,996			$	(11,194	)
Basic income (loss) per share		$	0.08			$	(0.45	)		$	0.13			$	(0.33	)
Diluted income (loss) per share		$	0.08			$	(0.45	)		$	0.13			$	(0.33	)
Shares used in computing income (loss) per share:
Weighted average shares-basic			69,489				34,320				60,630				34,159
Weighted average shares-diluted			69,489				34,320				60,630				34,159
Comprehensive income (loss):
Net income (loss)		$	5,365			$	(15,512	)		$	7,996			$	(11,194	)
Other comprehensive gain (loss), net of tax:
Foreign currency translation adjustment			120				(19	)			(76	)			4
Total comprehensive income (loss)		$	5,485			$	(15,531	)		$	7,920			$	(11,190	)

See Accompanying Notes to Condensed Consolidated Financial Statements

BROADVISION, INC. AND SUBSIDIARIES

		Nine Months Ended September 30,
		2006				2005
						(restated)
Cash flows from operating activities:
Net income (loss)		$	7,996			$	(11,194	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization			1,059				973
Allowance for doubtful accounts			459				(319	)
Restructuring credit			(1,403	)			(149	)
Stock based compensation			569				—
Gain on cost method investments			(386	)			(1,117	)
Loss on sale or abandonment of fixed assets			—				78
Provision (benefits) for income tax			24				(2,032	)
Loss (gain) on revaluation of warrants and change in value of derivatives			703				(11,042	)
Amortization of prepaid royalties			—				54
Amortization of discount on convertible notes			—				5,875
Impairment of goodwill			—				13,198
Changes in operating assets and liabilities:
Accounts receivable			5,299				4,113
Prepaids and other			(100	)			299
Other non-current assets			99				293
Accounts payable and accrued expenses			(2,010	)			(5,220	)
Restructuring accrual			(1,160	)			(24,023	)
Unearned revenue and deferred maintenance revenue			1,294				(4,345	)
Other non-current liabilities			(404	)			(81	)
Net cash provided by (used in) operating activities			12,039				(34,639	)
Cash flows from investing activities:
Purchase of property and equipment			(115	)			(132	)
Transfer from restricted cash			—				20,324
Proceeds from sale of cost method investments			386				590
Proceeds from dividends			—				1,101
Net cash provided by investing activities			271				21,883
Cash flows from financing activities:
Proceeds from bank line of credit, term debt, and convertible notes			—				35,000
Repayments of bank line of credit, term debt, and convertible notes			(389	)			(58,623	)
Proceeds from issuance of common stock, net			58				598
Net cash used for financing activities			(331	)			(23,025	)
Effect of exchange rates on cash and cash equivalents			76				(4	)
Net increase (decrease) in cash and cash equivalents			12,055				(35,785	)
Cash and cash equivalents at beginning of period			4,849				41,851
Cash and cash equivalents at end of period		$	16,904			$	6,066
Supplemental disclosures of cash flow information:
Cash paid for interest		$	197			$	663
Cash paid (refunds received) for income taxes		$	384			$	(547	)
Cash paid for restructuring accrual		$	1,112			$	27,875
Supplemental information of noncash financing and investing activities:
Exchange of convertible debt to common stock		$	20,535			$	—
Conversion of accrued interest to common stock		$	167			$	—

See Accompanying Notes to Condensed Consolidated Financial Statements

BROADVISION, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Organization and Summary of Significant Accounting Policies

Nature of Business

BroadVision, Inc. (collectively with its subsidiaries, “BroadVision” or the “Company”) was incorporated in the state of Delaware on May 13, 1993 and has been a publicly-traded corporation since 1996. BroadVision develops, markets, and supports enterprise portal applications that enable companies to unify their e-business infrastructure and conduct both interactions and transactions with employees, partners, and customers through a personalized self-service model that increases revenues, reduces costs, and improves productivity.

In September 2005, the Company received a notice from the Listing Qualifications Department of The Nasdaq Stock Market stating that it was not in compliance with the Minimum Bid Price Rule, and that it would be provided 180 calendar days (or until March 6, 2006) to regain compliance. Because of this non-compliance and in order to complete the stock for debt exchange described below without violating applicable listing standards, the Company delivered to Nasdaq a notification of voluntarily delisting of its common stock from the Nasdaq National Market, and its common stock was delisted from the Nasdaq National Market effective March 8, 2006. Accordingly, the last day of trading on the Nasdaq National Market was March 7, 2006. Quotations for BroadVision’s common stock are currently available through the “Pink Sheets” under the trading symbol “BVSN”.

In June 2006, William Meyer resigned as our Chief Financial Officer, a position Mr. Meyer had held since April 2003. Our Chief Executive Officer has also served as Chief Financial Officer since Mr. Meyer’s resignation and will continue to serve in that capacity until a permanent replacement is hired.

As discussed more fully in our consolidated financial statements contained in Item 8 of year 2005 Form 10-K, subsequent to the issuance of the 2004 consolidated financial statements, based on clarifying SEC guidance issued in 2005, we made a determination that the convertible debentures entered into in 2004 included embedded derivatives that should be valued under the provisions of Statement of Financial Standards (SFAS) No. 133 of the Financial Accounting Standards Board (FASB). We had previously determined that convertible debentures were conventional under the provisions of Emerging Issues Task Force Issue No. 00-19 (“EITF 00-19”), Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock. Therefore, we have restated our operating results for the three-month period and year ended December 31, 2004, and for the three-month periods ended March 31, June 30 and September 30, 2005.

Basis of Presentation

At September 30, 2006, the Company’s current liabilities exceeded current assets by approximately $4.1 million (negative working capital) resulting in a working capital ratio of approximately 0.86 to 1.0. Based on our current liquidity position, our analysis of the components of our current assets and liabilities, our actual financial results for the first nine months of 2006 and our internal financial forecast for the balance of the year, we currently expect to be able to fund our working capital requirements for the next 12 months from our existing cash and cash equivalents, including the proceeds from the recently expired rights offering, and our anticipated cash flows from operations and subleases. The Company received $16.4 million from the rights offering that expired on November 28, 2006 (See Note 9). Our Chairman, Chief Executive Officer and largest stockholder has committed to provide, upon our request at any time through December 31, 2006, up to $5 million of working capital support through cash, debt guarantees or a combination thereof on mutually satisfactory terms. Accordingly, no adjustments have been made to the carrying values or classification of the assets and liabilities in the accompanying financial statements to take into account of any uncertainty as to our ability to continue as a going concern.

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly- owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.

The financial results and related information as of September 30, 2006 and for the three and nine months ended September 30, 2006 and 2005 are unaudited. The condensed consolidated balance sheet at December 31, 2005 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 unaudited condensed consolidated financial statements should be reviewed in conjunction with the audited consolidated financial statements and related notes contained in the Company’s 2005 Annual Report on Form 10-K.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions in Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2006 are not necessarily indicative of the results that may be expected for the remainder of the fiscal year ending December 31, 2006.

Use of Estimates

The preparation of condensed 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 including those related to collectibility of customer accounts, the value assigned to and estimated useful lives of long-lived assets, the realizability of goodwill and tax assets, contingent liabilities and the valuation of equity securities.

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 which the product is installed. Licenses for software whereby fees charged are based upon the number of persons registered to use the product include 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 and 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 (“SOP 97-2”), as amended; SOP No. 98-9, Software Revenue Recognition, With Respect to Certain Transactions (“SOP 98-9”) and Staff Accounting Bulletin (“SAB”) 104, Revenue Recognition (“SAB 104”).

Software License Revenue

We license our products through our direct sales force and indirectly through resellers and Application Service Providers (“ASP”). 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 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 vendor-specific objective evidence, which is specific to us. We limit our 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.

Employee Stock Option and Purchase Plans

On December 16, 2004, the FASB issued SFAS 123 (revised 2004), Share-Based Payment (“SFAS 123R”). SFAS 123R supersedes Accounting Principles Board (“APB”) Opinion 25, Accounting for Stock Issued to Employees (“APB 25”), and amends SFAS No. 95, Statement of Cash Flows. Generally, the approach in SFAS 123R is similar to the approach described in SFAS 123, Accounting for Stock Compensation. However, SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values at the date of grant. Pro forma disclosure is no longer an alternative. On January 1, 2006 (the first day of its 2006 fiscal year), the Company adopted SFAS 123R using the modified prospective method as permitted under SFAS 123R. Under the modified prospective transition method, compensation cost recognized during the three months ended September 30, 2006 and nine months ended September 30, 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with SFAS 123, adjusted for an estimated future forfeiture rate, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. Under the modified-prospective-transition method, results for the prior periods have not been restated.

In anticipation of the reporting requirements under SFAS 123R, the Company’s Board of Directors on November 29, 2005 unanimously approved accelerating the vesting of out-of-the-money, unvested stock options held by current employees, including executive officers, and members of the Board of Directors. The acceleration applied only to those options with an exercise price of $1.13 per share or higher. The closing market price of the Company’s common stock on November 28, 2005, the last full trading day before the date of the acceleration, was $0.72 per share.

The Company has two share-based compensation plans: its 2006 Equity Incentive Plan (the “Equity Plan”) and its Employee Stock Purchase Plan (the “Purchase Plan”).

At the Company’s 2006 annual meeting on August 8, 2006, the stockholders of the Company approved the adoption of the Company’s 2006 Equity Incentive Plan, under which 3,500,000 shares of common stock are reserved for issuance. The Company’s 1996 Equity Incentive Plan (the prior Equity Plan) was terminated and replaced by the Equity Plan.

Under the Equity Plan, the Board of Directors may grant incentive or nonqualified stock options at prices not less than 100% of the fair market value of the Company’s common stock, as determined by the Board of Directors, at the date of grant. The vesting of individual options may vary but in each case at least 25% of the total number of shares subject to options will become exercisable per year. These options generally expire ten years after the grant date. When an employee option is exercised prior to vesting, any unvested shares so purchased are subject to repurchase by the Company at the original purchase price of the stock upon termination of employment. The Company’s right to repurchase lapses at a minimum rate of 20% per year over five years from the date the option was granted or, for new employees, the date of hire. Such right is exercisable only within 90 days following termination of employment.

As of September 30, 2006, the Company had 547,175 shares available for issuance under the Purchase Plan. The Purchase Plan permits eligible employees to purchase common stock with a value equivalent to a percentage of the employee’s earnings, not to exceed the lesser of 15% of the employee’s earnings or $25,000, at a price equal to the lesser of 85% of the fair market value of the common stock on the date of the offering or the date of purchase. Under APB 25, the Company was not required to recognize stock-based compensation expense for the cost of shares issued under the Company’s Stock Purchase Plan. Upon adoption of SFAS 123R, the Company began recording stock-based compensation expense related to the Purchase Plan.

The amount of stock-based compensation expense recognized during the nine months ended September 30, 2006 was approximately $569,000. All compensation expenses were charged to current operations.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model which uses the assumptions noted in the following table. Expected volatilities are based on historical volatilities of the Company’s stock over the expected term of the option. The Company uses historical data to estimate option exercise and employee termination within the valuation model. The expected term of options represent the period of time that options granted are expected to be outstanding. The risk free rate for periods within the expected life of the option is based on the U.S. Treasury rate that corresponds to the pricing term of the grant effective as of the date of the grant. There was no annual dividend rate assumed as cash dividend is not expected to be declared or to be paid in the foreseeable future. During the quarter ended September 30, 2006, the Company determined to use the forfeiture rate of 18% as it reasonably approximates the currently anticipated rate of forfeiture for granted and outstanding options. Because of the significant effect of non-recurring events, particularly the pursuit and abandonment in 2005 of the acquisition of the Company by a private equity group, the Company does not believe that its historical data before December 31, 2005 are a good indicator of future forfeiture rate. The Company’s financial and business conditions and stock price have stabilized significantly since the end of 2005. Therefore, the Company has used its actual historical forfeiture rate from January 1, 2006 through September 30, 2006 as the basis for its estimated annualized forfeiture rate in preparing the accompanying condensed consolidated financial statements. Prior to adoption of SFAS 123R, the Company recognized forfeitures under SFAS 123 as they occurred. The Company grants options under the Equity Plan to both employees and non-employee directors, for whom the vesting period of the grants is generally two to five years. For the three and nine months ended September 30, 2006, the following assumptions are used for these stock option grants to determine stock-based compensation expense:

		September 30, 2006
		Three Months Ended				Nine Months Ended
Weighted average volatility			85	%			85	%
Expected dividends			—				—
Expected term (in years)			3				3
Risk free rate			5	%			5	%
Forfeiture rate			18	%			18	%

Prior to the adoption of SFAS 123(R) on January 1, 2006, the Company accounted for employee stock-based awards in accordance with the provisions of APB 25, FASB Interpretation No. 44 (“FIN 44”), Accounting for Certain Transactions Involving Stock Compensation—an Interpretation of APB Opinion 25 and related interpretations. Accordingly, compensation expense was recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. Pursuant to SFAS 123, the Company disclosed the pro forma effects of using the fair value method of accounting for stock-based compensation arrangements. The Company accounted for equity instruments issued to non-employees in accordance with the provisions of SFAS 123 and EITF 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees For Acquiring or in Conjunction with Selling Goods or Services. In accordance with these accounting standards, we recorded no stock-based compensation expense for the three and nine months ended September 30, 2005.

The Company determined pro forma information regarding net income (loss) and net income (loss) per share in prior years 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. For purposes of pro forma disclosures during fiscal periods prior to the adoption of SFAS 123(R) on January 1, 2006, the estimated fair value of the options is amortized over the vesting period of the options using the straight-line method. The Company’s pro forma information previously reported for the three and nine months ended September 30, 2005 was as follows (in thousands, except for per share data):

		September 30, 2005
		Three Months Ended				Nine Months Ended
		(restated)				(restated)
Net loss, as reported		$	(15,512	)		$	(11,194	)
Add: Stock-based employee compensation expense included in reported net loss, net of related tax effects			—				—
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects			(219	)			(1,668	)
Pro forma net loss		$	(15,731	)		$	(12,862	)
Weighted average common shares outstanding utilized for:
Basic net loss			34,320				34,159
Diluted net loss			34,320				34,159
Loss per share:
Basic—as reported		$	(0.45	)		$	(0.33	)
Basic—pro forma		$	(0.46	)		$	(0.38	)
Diluted—as reported		$	(0.45	)		$	(0.33	)
Diluted—pro forma		$	(0.46	)		$	(0.38	)

As of September 30, 2006, the Company had reserved 9,279,469 common shares for future issuance upon the exercise of outstanding stock options and warrants.

The Company’s Chairman and Chief Executive Officer (“CEO”) has options to purchase 1,704,444 shares of common stock at an average exercise price of $38.60 per share. The table below is a summary of options granted to him through September 30, 2006:

Date Granted		Options Granted				Options Price				Vested				Vesting Period (Months)
6/23/1999			500,000			$	60				500,000				60
5/25/2001			500,000				67				500,000				48
11/27/2001			4,444				35				4,444				24
2/19/2002			55,555				19				55,555				48
10/30/2002			644,445				2				644,445				48
Totals			1,704,444								1,704,444

Activity in the Company’s Equity Plan and the Company’s 1996 Equity Incentive Plan (the “Prior Equity Plan”), which was terminated and replaced by the Equity Plan, is as follows:

		Nine Months Ended,
		September 30, 2006
						Weighted				Aggregate
						Average				Intrinsic				Number of
		Options				Exercise				Value				Nonvested
		(’000)				Price				(’000)				Options
Outstanding at December 31, 2005			3,765			$	23.48			$	—				—
Granted			3,512				0.57				451				2,413
Exercised			(27	)			0.56				—				—
Forefeited			(184	)			3.74				—				—
Expired			(942	)			5.13
Outstanding at September 30, 2006			6,124			$	13.86			$	451				2,413
Option exercisable at the end of period			3,712			$	22.49			$	115
Weighted-average fair value of options granted during the period		$	0.32
Number of options vested during the period			821			$	0.57

The Company grants options outside of the Equity Plan. The terms of these options are generally identical to those granted under the Company’s plan. A summary of options outside of the Equity Plan and the Prior Equity Plan is presented below:

		Nine Months Ended,
		September 30, 2006
						Weighted				Aggregate
						Average				Intrinsic				Number of
		Options				Exercise				Value				Nonvested
		(’000)				Price				(’000)				Options
Outstanding at December 31, 2005			588			$	23.48			$	—				—
Granted			432				0.53				—				—
Exercised			—				—				—				—
Forefeited			(193	)			6.86				—				—
Expired			(10	)			100.06
Outstanding at September 30, 2006			817			$	9.39			$	—				—
Option exercisable at the end of period			501			$	14.98			$	8
Weighted-average fair value of options granted during the period		$	0.29
Number of options vested during the period			27			$	0.57

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the quoted price of our common stock for the options that were in the money at September 30, 2006. The total compensation cost related to the nonvested stock options not yet recognized is approximately $120,000 for year 2006, $473,000 for year 2007, and $87,000 for year 2008.

The Company granted 144,000 shares of restricted stock to the non-employee members of its Board of Directors in March 2006.

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. There were 11.0 million and 10.5 million potential common shares excluded from the determination of diluted net income per share for the three and nine months ended September 30, 2006, as the effect of each share was anti-dilutive because the per-share strike price of the options under which these shares may be issued is higher than current market price. There were 7.6 million and 7.5 million potential common shares from the conversion of outstanding convertible notes excluded in the diluted shares outstanding during the three months and nine months ended September 30, 2005, respectively, as the effect of such shares is anti-dilutive. The following table sets forth the basic and diluted income per share computational data for the periods presented.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2006				2005				2006				2005
						(restated)								(restated)
Net income (loss)		$	5,365			$	(15,512	)		$	7,996			$	(11,194	)
Weighted average common shares outstanding utilized for basic net income per share			69,489				34,320				60,630				34,159
Potential common stock issued for options			—				—				—				—
Weighted average common shares outstanding utilized for diluted net income per share:			69,489				34,320				60,630				34,159
Basic net income (loss) per share		$	0.08			$	(0.45	)		$	0.13			$	(0.33	)
Diluted net income (loss) per share		$	0.08			$	(0.45	)		$	0.13			$	(0.33	)

Foreign Currency Transactions

The Company’s functional currencies for all foreign subsidiaries are 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. Currency translation adjustments are recorded in other comprehensive income (loss), a component of stockholders’ equity. 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. Foreign exchange gains and losses for the three months ended September 30, 2006 was an expense of $32,000 as compared to expense of $33,000 for the three months ended September 30, 2005. Foreign exchange gains and losses for the nine months ended September 30, 2006 was an expense of $206,000 as compared to expense of $128,000 for the nine months ended September 30, 2005.

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 and SFAS No. 142, Goodwill and Other Intangible Assets.

The Company adopted SFAS No.142, Goodwill and Other Intangible Assets (“SFAS 142”), on January 1, 2002. 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. SFAS 142 provides for a two-step approach to determining whether and by how much goodwill has been impaired. The first 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 step must be completed to determine the amount, if any, of actual impairment. For the three and nine months ended September 30, 2006, there were no such impairments of goodwill, or other long-lived assets. For the three and nine months ended September 30, 2005, the Company has recognized a goodwill impairment charge of $13.2 million, respectively.

Reclassification

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

Comprehensive Income (Loss)

Comprehensive income (loss) includes net income (loss) and other comprehensive income (loss), which consists of cumulative foreign currency translation adjustments. Total accumulated other comprehensive income (loss) is displayed as a separate component of stockholders’ equity in the accompanying Condensed Consolidated Balance Sheets and is summarized as follows: (in thousands):

		Foreign				Accumulated Other
		Currency				Comprehensive
		Translation				Income (Loss)
Balance, December 31, 2005		$	93			$	93
Net change during period			76				76
Balance, September 30, 2006		$	169			$	169

New Accounting Pronouncements

In June 2006, the EITF reached a consensus on Issue No. 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement”. The scope of EITF 06-3 includes sales, use, value added and some excise taxes that are assessed by a governmental authority on specific revenue-producing transactions between a seller and customer. EITF 06-3 states that a company should disclose its accounting policy (i.e., gross or net presentation) regarding the presentation of taxes within its scope, and if significant, these disclosures should be applied retrospectively to the financial statements for all periods presented. EITF 06-3 is effective for interim and annual reporting periods beginning after December 15, 2006. The adoption of EITF 06-3 is not expected to have a material effect on the Company’s financial position, results of operations or cash flows.

In July 2006, the FASB issued FASB Interpretation No. 48 Accounting for Uncertainty in Income Taxes (“FIN No. 48”) which prescribes a recognition threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in a tax return. Additionally, FIN No. 48 provides guidance on the derecognition, classification, accounting in interim periods and disclosure requirements for uncertain tax positions. The accounting provisions of FIN No. 48 will be effective for fiscal years beginning after December 15, 2006. The Company is in the process of determining the effect, if any, that the adoption of FIN No. 48 will have on its financial statements.

In September 2006, the SEC issued SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB No. 108 provides guidance on how prior year misstatements should be taken into consideration when quantifying misstatements in current year financial statements for purposes of determining whether the current year’s financial statements are materially misstated. SAB No. 108 is effective for fiscal years ending on or after November 15, 2006. The Company is currently in the process of evaluating the impact of SAB No. 108 on our financial position and results of operations.

In September 2006, the FASB issued SFAS No. 157, FairValue Measurements. SFAS No. 157 establishes a framework for measuring the fair value of assets and liabilities. This framework is intended to provide increased consistency in how fair value determinations are made under various existing accounting standards which permit, or in some cases require, estimates of fair market value. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier application is encouraged, provided that the reporting entity has not yet issued financial statements for that fiscal year, including any financial statements for an interim period within that fiscal year. The Company is currently in the process of evaluating the impact of SFAS No. 157 on our financial position and results of operations.

Note 2. Selected Balance Sheet Detail

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

		September 30,				December 31,
		2006				2005
		(unaudited)
Furniture and fixtures		$	2,531			$	2,791
Computers and software			32,369				32,705
Leasehold improvements			5,652				6,219
			40,552				41,715
Less accumulated depreciation and amortization			(39,162	)			(39,381	)
		$	1,390			$	2,334

Accrued expenses consists of the following (in thousands):

		September 30,				December 31,
		2006				2005
		(unaudited)
Employee benefits		$	1,085			$	1,048
Commissions and bonuses			744				533
Sales and other taxes			3,261				3,885
Restructuring (See Note 6)			1,254				5,533
Accrued royalties			2,594				2,483
Other			3,013				2,608
		$	11,951			$	16,090

Note 3. Bank Borrowings, Convertible Notes and Other Non-Current Liabilities

Bank borrowings consists of the following (in thousands):

		September 30,				December 31,
		2006				2005
		(unaudited)
Bank borrowings – Term debt		$	—			$	389
			—				389
Less: Current portion of bank borrowings			—				(389	)
Long-term debt, net of current portion		$	—			$	—

The Company has maintained various credit facilities with a commercial lender:

	•		At December 31, 2005, the Company maintained a revolving line of credit in the form of a loan and security agreement with a commercial lender, which expired in February 2006. No amounts were outstanding under this credit facility as of the third quarter of 2006.
	•		The Company has entered into term debt in the form of notes payable with the same lender. The term debt requires monthly payments of approximately $38,000 plus interest through October 2006, and monthly payments of approximately $2,000 for the five months ending March 2007. A portion of the term debt was utilized for an equipment line of credit. Principal and interest are due in monthly payments through maturity based on the terms of the facilities. As of December 31, 2005, the entire balance of $389,000 was classified as currently due. The Company paid off the entire balance in the third quarter of 2006.

Convertible Notes

In November 2004, the Company issued $16.0 million of notes that were convertible, at the holders’ option, into common stock at a conversion price of $2.76 per share, subject to adjustment in certain defined circumstances, including dilutive equity issuances (the “Notes”). The Notes bore interest at a rate of six percent per annum. In October 2005, the Company inadvertently did not make timely payment of the third quarter interest payment due under the Notes. Lack of timely payment became an event of default. As a result, the event of default permitted each noteholder to require the Company to redeem 120% of all or any portion of the amounts outstanding under the applicable Note. During the quarter ended December 31, 2005, the Company recorded additional principal of $2.6 million, which represented the 20% increase in the redeemable debt premium.

In November 2005, the Notes were purchased by an unaffiliated investor, and subsequently on November 18, 2005, the Notes were purchased by an entity controlled by Dr. Pehong Chen, the Company’s Chairman and Chief Executive Officer. On December 20, 2005, in order to relieve BroadVision from the liquidity challenges presented by the Notes, Dr. Chen and the Company entered into a Debt Conversion Agreement whereby Dr. Chen agreed to cancel all amounts owed under the Notes in exchange for 34,500,000 shares of BroadVision common stock, which were issued in March 2006 as discussed below, at an effective price per share of $0.45, representing a 25% discount to the December 20, 2005 closing price of BroadVision common stock of $0.60 per share. Because of the significant difference between the $0.45 per share exchange price and the $2.76 per share conversion price included in the Notes, the Company accounted for this transaction as a deemed extinguishment and reissuance of the Notes. A loss of $7.0 million was recorded in December 2005 under APB No. 26, Extinguishment of Debt, equal to fair value of the reissued Notes (which was determined to be the fair value of the underlying common shares into which the Notes were to be exchanged) less the carrying value of the extinguished Notes. As a result, the Notes were carried at December 31, 2005 at fair value of the Common Stock on December 20, 2005 of $20.5 million less shares representing interest of $165,000.

In March 2006, the notes were cancelled and the related shares were issued. As a result of this share issuance, the percentage of the Company’s outstanding shares of common stock held by Dr. Chen increased to approximately 59%. The issuance of shares was recorded in Stockholders’ equity (deficit) at the amount then outstanding of $20.5 million.

The Company made a determination that the convertible notes entered into in 2004 included certain embedded derivatives (conversion feature and additional investment rights) that should be valued under the provisions of SFAS 133, Accounting for Derivative Instruments and Hedging Activities (“SFAS 133”). The additional investment rights expired during the quarter ended September 30, 2005. Accordingly, the conversion feature and additional investment rights have been revalued each applicable reporting period under SFAS 133, with the resulting gains and losses recorded in the accompanying Consolidated Statements of Operations. Further, in conjunction with the December 20, 2005 Debt Conversion Agreement, the conversion feature was no longer considered to be a derivative, as the conversion rate was

fixed at $0.45 per share. Additional investment rights of $132,000 were included in the fair value of the Notes upon modification on December 20, 2005.

In conjunction with the issuance of the Notes to the institutional investors in the original private placement, the Company issued warrants to purchase 1,739,130 shares of common stock at an exercise price of $3.58 per share. The issuance of shares to Dr. Chen in March 2006 under the terms of the Debt Conversion Agreement resulted in an adjustment in the exercise price of, and number of shares underlying, the warrants, pursuant to the terms of such warrants. As a result, the warrants became exercisable for 3,082,219 common shares at an exercise price of $2.02 per shares. The warrants were exercisable beginning in May 2005 and have a five-year life. None of the warrants have been exercised as of September 30, 2006. The warrants have been accounted for as a derivative under SFAS 133, as the warrants allow for the potential settlement in cash. As such, the warrants have been revalued each reporting period under SFAS 133, with the resulting gains and losses recorded in the accompanying Consolidated Statements of Operations.

As of September 30, 2006, the following warrants to purchase the Company’s common stock were outstanding:

		Underlying				Exercise Price
Description		Shares				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			3,082,219				2.02
Other issued in connection with revenue transactions in 1997 and 2000			4,798			Various
Total warrants			3,787,017

The warrant issued in connection with the real estate transaction has a term of five years and became exercisable beginning in August 2005. The warrant had not been exercised as of September 30, 2006.

In connection with the Note cancellation and stock issuance discussed above the warrants issued to the original Note purchases in November 2004 (see Note 3), which were originally exercisable to purchase 1,739,130 shares at an exercise price of $3.58 per share, were adjusted such that, following share issuance pursuant to the Note Conversion Agreement, the warrants became exercisable for 3,082,219 common shares at an exercise price of $2.02 per share. The Company recorded a charge of $282,000 in the quarter ended March 31, 2006 to reflect the issuance of additional warrants, in its consolidated financial statements. The remaining terms of the warrants were unchanged. The warrants have a term of five years and became exercisable beginning in May 2005. None had been exercised as of September 30, 2006.

In accordance with EITF 00-19, the warrants issued to the original Note purchases have been included as a short-term liability 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 and nine months ended September 30, 2006, the Company recorded loss related to the revaluation of warrants to the landlord and note holders of approximately $317,000 and $703,000, respectively. For the three and nine months ended September 30, 2005, the Company recorded gain related to the revaluation of warrants to the landlord and note holders of approximately $794,000 and $11,042,000, respectively. These gains and losses are included of other income (expense), net 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.

Gains (losses) on the revaluation of the warrants and the embedded derivatives were recorded as follows (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2006				2005				2006				2005
						(restated)								(restated)
Warrants related to the Notes		$	(271	)		$	523			$	(670	)		$	3,019
Warrants related to real estate buyout			(46	)			175				(33	)			1,192
Conversion Feature			—				96				—				5,964
Additional Investment Rights			—				—				—				867
(Loss) gain on revaluation of warrants and change in value of derivatives		$	(317	)		$	794			$	(703	)		$	11,042

Other Non-Current Liabilities

Other non-current liabilities consist of the following:

		September 30,				December 31,
		2006				2005
Restructuring (Note 6)		$	3,438			$	1,722
Deferred maintenance and unearned revenue			1,887				2,334
Other			377				334
Total other non-current liabilities		$	5,702			$	4,390

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’s insurance policy that limits its exposure and enables the Company to recover a portion of any future amounts paid. As a result of the Company’s insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is insignificant. Accordingly, the Company has no liabilities recorded for these agreements as of either September 30, 2006 or December 31, 2005. 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 headquarter facility and its other facilities under non-cancelable operating lease agreements expiring through the year 2012. Under the terms of the lease agreements, the Company is required to pay rental costs, property taxes, insurance and normal maintenance costs.

A summary of total future minimum lease payments, net of future sublease income, as of September 30, 2006, under non-cancelable operating lease agreements is as follows (in millions):

		Total future
		minimum
Years Ending December 31,		payments
2006		$	0.4
2007			2.7
2008			1.7
2009			1.7
2010			1.2
2011 and thereafter			1.7
Total minimum lease payments		$	9.4

Standby Letter of Credit Commitments

As of September 30, 2006, the Company had $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. Restricted cash of $2.0 million supports the letters of credit, as collateral. By their terms, the letters of credit expire in

December 2006 and June 2007, for $1.0 million each. The terms of the collateral arrangements expire with respect to $1.0 million in each of December 2007 and October 2012. Such cash will become non-restricted when the terms of the collateral arrangements expire.

Legal Matters

The Company is subject from time to time to various legal actions and other claims arising in the ordinary course of business. The Company is not presently a party to any material legal proceedings. Management believes that exposure related to any potential legal proceedings is immaterial to the Company’s financial results.

Note 5. Geographic, Segment and Significant Customer Information

The Company operates in one segment, electronic business commerce solutions. The Company’s reportable geographic segment includes the Company’s facilities in North America (“Americas”), Europe and Asia Pacific and the Middle East (“Asia/Pacific”). The 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 is as follows (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2006				2005				2006				2005
Software licenses		$	4,750			$	3,134			$	11,259			$	10,941
Consulting services			2,702				4,403				9,697				14,706
Maintenance			6,133				6,540				17,982				20,311
Total revenues		$	13,585			$	14,077			$	38,938			$	45,958

The Company sells its products and provides services worldwide through a direct sales force and through a channel of independent distributors, value added resellers (VAR) and application service providers (ASP). 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								Nine Months Ended
		September 30,								September 30,
		2006				2005				2006				2005
Revenues:
Americas		$	8,119			$	8,252			$	28,771			$	25,948
Europe			3,029				4,359				5,650				15,688
Asia/Pacific			2,437				1,466				4,517				4,322
Total revenues		$	13,585			$	14,077			$	38,938			$	45,958

		September 30,				December 31,
		2006				2005
		(unaudited)
Long-Lived Assets:
Americas		$	26,695			$	29,039
Europe			220				328
Asia/Pacific			584				445
Total long-lived assets		$	27,499			$	29,812

During the three and nine months ended September 30, 2006 and 2005, no single customer accounted for more than 10%

of the Company’s revenues.

Note 6. Restructuring Charges

Through September 30, 2006, 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 the Company’s cost structure with changing market conditions and to create a more efficient organization. The Company’s restructuring charges have been comprised primarily of: (i) severance and benefits termination costs related to the reduction of its 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. The Company accounts for each of these costs in accordance with SAB 100, Restructuring and Impairment Changes (SAB 100).

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. For exit or disposal activities initiated on or prior to December 31, 2002, the Company accounted for severance and benefits termination costs in accordance with EITF 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”). The Company accounts for severance and benefits termination costs for exit or disposal activities initiated after December 31, 2002 in accordance with SFAS 146, Accounting For Costs Associated with Exit Activities (“SFAS 146”).

• 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. 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.

As of September 30, 2006, the total restructuring accrual of $4.7 million consisted of the following (in millions):

		Current				Non-Current				Total
Severance and Termination		$	0.4			$	—			$	0.4
Excess Facilities			0.9				3.4				4.3
Total		$	1.3			$	3.4			$	4.7

The Company estimates that the $0.4 million severance and termination accrual will be nearly paid in full by December 31, 2006. We expect to pay the excess facilities amounts related to restructured or abandoned leased space as follows (in millions):

		Total future
		minimum
Years Ending December 31,		payments
2006		$	0.1
2007			1.2
2008			0.8
2009			0.8
2010			0.6
2011 and thereafter			0.8
Total minimum lease payments		$	4.3

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

		Accrued				Charged to
		restructuring				restructuring								Accrued
		costs,				costs				Amounts paid				restructuring
		beginning				and other				or written off				costs, ending
Three Months Ended September 30, 2006
Lease cancellations and commitments		$	4,399			$	(2,035	)		$	(46	)		$	2,318
Termination payments to employees and related costs			38				(6	)							32
		$	4,437			$	(2,041	)		$	(46	)		$	2,350
Three Months Ended September 30, 2005
Lease cancellations and commitments		$	3,964			$	(61	)		$	175			$	4,078
Termination payments to employees and related costs			655				444				(776	)			323
		$	4,619			$	383			$	(601	)		$	4,401
Nine Months Ended September 30, 2006
Lease cancellations and commitments		$	4,188			$	(1,927	)		$	57			$	2,318
Termination payments to employees and related costs			105				368				(441	)			32
		$	4,293			$	(1,559	)		$	(384	)		$	2,350
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

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				Charged to
		restructuring				restructuring								Accrued
		costs,				costs				Amounts paid				restructuring
		beginning				and other				or written off				costs, ending
Three Months Ended September 30, 2006
Lease cancellations and commitments		$	1,992			$	163			$	(150	)		$	2,005
Termination payments to employees and related costs			332								4				336
		$	2,324			$	163			$	(146	)		$	2,341
Three Months Ended September 30, 2005
Lease cancellations and commitments		$	6,326			$	(137	)		$	(2,930	)		$	3,259
Termination payments to employees and related costs			422				—				(70	)			352
		$	6,748			$	(137	)		$	(3,000	)		$	3,611
Nine Months Ended September 30, 2006
Lease cancellations and commitments		$	2,651			$	156			$	(802	)		$	2,005
Termination payments to employees and related costs			311								25				336
		$	2,962			$	156			$	(777	)		$	2,341
Nine Months Ended September 30, 2005
Lease cancellations and commitments		$	11,515			$	(287	)		$	(7,969	)		$	3,259
Termination payments to employees and related costs			459				—				(107	)			352
		$	11,974			$	(287	)		$	(8,076	)		$	3,611

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.

In July and August 2004, the Company negotiated lease terminations with a landlord for its lease commitment. One of the features of the lease termination agreement is an option to buy out the lease by paying an additional $4.5 million by September 2006. In accordance with SFAS 146, the Company recorded this buyout as restructuring liability in the third quarter of 2004.

In September 2006, the Company decided not to exercise the $4.5 million lease buy-out option and instead decided to occupy a portion of the new space and sub-lease the remaining excess space. The buy out option expired in September 2006. As a result, the Company reversed the restructuring accrual related to the $4.5 million lease buy out and recorded a new restructuring accrual for the excess lease facility space. The net expense reversal or credit (benefit) of $1.9 million was reported in the third quarter of 2006 under operating expenses in the accompanying condensed consolidated statement of operations.

Note 7. Stockholders’ Equity (Deficit)

As discussed in more detail in Note 3, in December 2005 Dr. Chen entered into a Debt Conversion Agreement whereby Dr. Chen agreed to cancel all amounts owed under the Notes in exchange for 34,500,000 shares of BroadVision common stock. In March 2006, the Notes were cancelled and the related shares were issued. As a result of this share issuance, the $20.5 million Notes carrying amount of fair value at December 31, 2005 was converted to common stock and additional paid-in-capital in the first quarter of 2006.

Note 8. Related Party Transactions

The Company’s Chairman, Chief Executive Officer and largest stockholder has committed to provide, upon our request at any time through December 31, 2006, up to $5 million of working capital support through cash, debt guarantees or a combination thereof on mutually satisfactory terms.

See Note 3, Convertible Notes, for the transactions among the CEO, unaffiliated investors and the Company from 2004 through 2006.

In 2006, the Company executed consulting agreement with a third party in which the CEO is a passive owner and convertible note holder. The total contract value is $365,000. For the three quarters ended September 30, 2006, $93,000 was recognized as revenue. The Company received payment for the entire contract in the third quarter of 2006. The contract is expected to be completed in the fourth quarter of 2006.

Note 9. Subsequent Event

The Company’s rights offering expired on November 28, 2006. Eligible participants exercised rights to purchase 36.4 million shares, resulting in $16.4 million in gross proceeds for the Company.

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 are designed to help customers 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, Audible, Netikos, Sears, 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 five fiscal years.

Our objective is to further our position as a global supplier of web-based, self-service applications. This will require us to continue to build new functionality into 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, and related 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 utilized by the machine on which the product is installed. Payment terms are generally 30 days from the date the products are delivered, the maintenance contract is booked or the consulting services are provided. In certain European markets payment cycles are 60 to 90 days, in accordance with local practice.

From 2001 through 2005, we incurred significant losses and negative cash flows from operations. In 2004 and 2005, we also incurred significant cash usage related to the termination of excess real estate obligations, certain reductions in workforce and the execution and subsequent termination of an acquisition agreement. Based on our current liquidity position, our analysis of the components of our current assets and liabilities, our actual financial results for the first nine months of 2006 and our internal financial forecast for the balance of the year, we currently expect to be able to fund our working capital requirements for the next 12 months from our existing cash and cash equivalents and our anticipated cash flows from operations and subleases, and our recently concluded rights offering.

We strive to anticipate changes in the demand for our services and aggressively manage our labor force appropriately. Through our budgeting process, cross-functional management participates in the planning, reviewing and managing of our business plans. This process 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

In November 2005, an entity controlled by Dr. Pehong Chen, our Chairman and Chief Executive Officer, acquired all of our Notes then outstanding. Including interest, the Notes represented $15.5 million in debt obligations as of December 15, 2005. In order to relieve us from the liquidity challenges presented by the Notes, in December 2005, Dr. Chen agreed to cancel all amounts owed under the Notes in exchange for 34,500,000 shares of BroadVision common stock, at an effective price per share of $0.45, a 25% discount to the December 20, 2005 closing price of BroadVision common stock, and $180,000 in cash that represented the portion of the accrued interest on the Notes that was not paid in stock. That exchange was completed in March 2006. The shares of common stock issued to Dr. Chen, representing approximately 50% of the post-conversion shares outstanding, increased Dr. Chen’s ownership interest in BroadVision to approximately 59% of the total shares outstanding.

In December 2005, we announced our intention to launch a rights offering to allow each stockholder as of December 20, 2005 to purchase approximately 5.9 shares for each share of BroadVision common stock held as of such date, at a price per share of $0.45. The primary purpose of the rights offering is to allow the holders of BroadVision common stock an opportunity to further invest in BroadVision in order to maintain their proportionate interest in BroadVision common

stock, at the same price per share as the per share price afforded to Dr. Chen in connection with the Note exchange. Dr. Chen waived his right to participate in the rights offering. Our rights offering expired on November 28, 2006. Eligible participants exercised rights to purchase approximately 36.4 million shares, resulting in our receipt of $16.4 million in gross proceeds.

In order to complete the issuance of shares to Dr. Chen without violating applicable listing standards, we delivered to Nasdaq a notification of voluntary delisting of BroadVision common stock from the Nasdaq National Market effective prior to the opening of trading on March 8, 2006. We had previously received a notice from Nasdaq stating that we were not in compliance with the minimum bid price rules applicable to stocks traded on Nasdaq, and that we had until March 6, 2006 to regain compliance. Quotations for BroadVision common stock are currently available through the “Pink Sheets” (www.pinksheets.com) under the trading symbol “BVSN”.

In March 2006, we received a $1.2 million property tax refund from the County of San Mateo covering tax years 2000 through 2005. We are obligated to compensate an outside tax specialist $335,000 for its efforts to reach agreement with the County on our behalf. The net proceeds were accounted in the operating expenses for the quarter ended March 31, 2006.

In June 2006, William Meyer resigned as our Chief Financial Officer, a position Mr. Meyer had held since April 2003. Dr. Chen has served as Chief Financial Officer since Mr. Meyer’s resignation and will continue to serve in that capacity until a permanent replacement is hired.

On October 13, 2006, the Audit Committee of the Board of Directors of the Company approved the replacement of Stonefield Josephson, Inc. (“Stonefield Josephson”) as our independent registered public accounting firm, and we advised Stonefield Josephson of its dismissal on October 14, 2006. On October 16, 2006, we engaged the independent registered public accounting firm Odenberg, Ullakko, Muranishi & Co. LLP (“OUM”) as our new independent accountants.

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 allowance for doubtful accounts, goodwill and intangible assets, equity instruments, 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 our critical accounting policies reflect the more significant judgments and estimates used in the preparation of our condensed consolidated financial statements.

At September 30, 2006, our current liabilities exceeded current assets by approximately $4.1 million (negative working capital) resulting in a working capital ratio of approximately 0.86 to 1.0. Based on our current liquidity position, our analysis of the components of our current assets and liabilities, our actual financial results for the first nine months of 2006 and our internal financial forecast for the balance of the year, we currently expect to be able to fund our working capital requirements for the next 12 months from our existing cash and cash equivalents, including the proceeds from the recently expired rights offering, and our anticipated cash flows from operations and subleases. Our Chairman, Chief Executive Officer and largest stockholder has committed to provide, upon our request at any time through December 31, 2006, up to $5 million of working capital support through cash, debt guarantees or a combination thereof on mutually satisfactory terms. Accordingly, no adjustments have been made to the carrying values or classification of the assets and liabilities in the accompanying financial statements to take account of any uncertainty as to our ability to continue as a going concern.

As discussed more fully in our consolidated financial statements contained in Item 8 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2005, subsequent to the issuance of the 2004 consolidated financial statements, based on clarifying SEC guidance issued in 2005, we made a determination that the convertible debentures entered into in 2004 included embedded derivatives that should be valued under the provisions of SFAS 133. We had previously determined that convertible debentures were conventional under the provisions of EITF 00-19. Therefore, we have restated our operating results for the three-month period and year ended December 31, 2004, and for the three-month periods ended March 31, June 30 and September 30, 2005.

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 include 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 (“SOP 97-2”), as amended; SOP No. 98-9, Software Revenue Recognition, With Respect to Certain Transactions (“SOP 98-9”) and SAB 104, Revenue Recognition (“SAB 104”).

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 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 vendor specific 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. Pursuant to SFAS 142, we are required to test goodwill for impairment upon adoption and annually or more often if events or changes in circumstances indicate that the asset might be impaired. SFAS No. 142 provides for a two-step approach to determining whether and by how much goodwill has been impaired. Since we have only one reporting unit for purposes of applying SFAS No. 142, the first step requires a comparison of the fair value of BroadVision to our 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 step must be completed to determine the amount, if any, of actual impairment. Our last impairment test was as of December 31, 2005. There were no events or circumstances from that date through September 30, 2006 indicating that a further assessment was necessary. As of September 30, 2006, our market capitalization was significantly higher than our book 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 any potential loss of net operating loss (NOL), estimated future taxable income and ongoing prudent and feasible tax planning strategies in assessing the amount of the valuation allowance. There may be limitations on our ability to utilize NOLs, due to change of ownership. We are engaging tax specialist to evaluate the effect.

Accounting for Stock-Based Compensation

On January 1, 2006 (the first day of its 2006 fiscal year), we adopted SFAS 123R using the modified prospective method as permitted under SFAS 123R. Under the modified-prospective-transition method, results for the prior periods have not been restated.

In anticipation of the reporting requirements under SFAS 123R, our Board of Directors on November 29, 2005 unanimously approved accelerating the vesting of out-of-the-money, unvested stock options held by current employees, including executive officers, and Board members. The acceleration applied only to those options with an exercise price of $1.13 per share or higher. The closing market price of BroadVision common stock on November 28, 2005, the last full trading day before the date of the acceleration, was $0.72 per share. The following table summarizes the options for which vesting was accelerated:

		Aggregate Number of Common Shares				Weighted Average
		Issuable Under Accelerated Stock Options				Exercise Price Per Share
Total Non-Employee Directors			122,181			$	2.98
Total Named Executive Officers			391,886				2.87
Total Directors and Named Executive			514,067				2.89
Total All Other Employees			610,707				2.97
Total			1,124,774				2.94

The decision to accelerate vesting of these options was made to avoid recognizing compensation cost in the Company’s statements of operations as required under the provisions of SFAS 123R, which was effective as of January 1, 2006.

In accordance with SFAS 123R, in our first nine months of 2006 we started to recognize compensation expense related to stock options granted to employees based on: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with SFAS 123, adjusted for an estimated future forfeiture rate, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R.

Our assessment of the estimated fair value of the stock options granted is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. We utilize the Black-Scholes model to estimate the fair value of stock options granted. Generally, our calculation of the fair value for options granted under SFAS 123R is similar to the calculation of fair value under SFAS 123 with the exception of the treatment of forfeitures. The fair value of restricted stock units granted is based on the grate date price of our common stock.

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. This model also requires the input of highly subjective assumptions including:

	•		The expected volatility of our common stock price, which we determine based on historical volatility of our common stock over the expected term of the option;
	•		Expected dividends, which are nil, as we do not currently anticipate issuing dividends;
	•		Expected life of the stock option, which is estimated based on the historical stock option exercise behavior of our employees; and
	•		Expected forfeitures of stock options, which is estimated based on the historical turnover of our employees. Prior to adoption of FAS 123R, we recognized forfeitures under FAS 123 as they occurred.

In the future, we may elect to use different assumptions under the Black-Scholes valuation model or a different valuation model, which could result in a significantly different impact on our net income or loss.

Restructuring Charges

Through September 30, 2006, 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:

• 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. We have 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.

Research and Development and Software Development Costs

Under the criteria set forth in SFAS No. 86, Accounting for the Cost of Computer Software to be Sold, Leased or Otherwise Marketed, development costs incurred in the research and development of new software products are expensed as incurred until technological feasibility in the form of a working model has been 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 has not capitalized any costs related to the development of software for external use.

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 September 30, 2006 (in thousands, unaudited) and as of December 31, 2005 (in thousands):

		September 30,				December 31,
		2006				2005
		(unaudited)
		(Fair value)				(Fair value)
Cash and certificates of deposits		$	15,746			$	4,030
Money market			1,158				819
Total cash and equivalents		$	16,904			$	4,849

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 nine months ended September 30, 2006, no one customer accounted for more than 10% 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.

Legal Matters

We are subject from time to time to various legal actions and other claims arising in the ordinary course of business. We are not presently a party to any material legal proceedings. Management believes that exposure related to any potential legal proceedings is immaterial to the Company’s financial results.

Results of Operations

Revenues

Total revenues decreased 4% during the three months ended September 30, 2006 to $13.6 million as compared to $14.1 million for the three months ended September 30, 2005. Total revenues decreased 15% during the nine months ended September 30, 2006 to $38.9 million as compared to $46.0 million for the nine months ended September 30, 2005. A summary of our revenues by geographic region is as follows (dollars in thousands, unaudited):

		Software
		Licenses				%				Services				%				Total				%
Three Months Ended:
September 30, 2006
Americas		$	3,249				68	%		$	4,870				55	%		$	8,119				60	%
Europe			462				10				2,567				29				3,029				22
Asia Pacific			1,039				22				1,398				16				2,437				18
Total		$	4,750				100	%		$	8,835				100	%		$	13,585				100	%
September 30, 2005
Americas		$	1,724				55	%		$	6,528				60	%		$	8,252				59	%
Europe			830				26				3,529				32				4,359				31
Asia Pacific			580				19				886				8				1,466				10
Total		$	3,134				100	%		$	10,943				100	%		$	14,077				100	%
Nine Months Ended:
September 30, 2006
Americas		$	8,645				77	%		$	20,126				73	%		$	28,771				74	%
Europe			1,175				10				4,475				16				5,650				14
Asia Pacific			1,439				13				3,078				11				4,517				12
Total		$	11,259				100	%		$	27,679				100	%		$	38,938				100	%
September 30, 2005
Americas		$	5,430				50	%		$	20,518				59	%		$	25,948				57	%
Europe			3,814				35				11,874				34				15,688				34
Asia Pacific			1,697				15				2,625				7				4,322				9
Total		$	10,941				100	%		$	35,017				100	%		$	45,958				100	%