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SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

Form 20-F

(Mark One)

|o                                            | REGISTRATION
  STATEMENT PURSUANT TO SECTION 12(b) or (g) OF THE SECURITIES EXCHANGE ACT OF
  1934
|-------------------------------------------- | --------------------------------------------------------------------------------------------------
|                                            
|OR                                          
|                                            
|x                                            | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
  SECURITIES EXCHANGE ACT OF 1934            
|                                             |                                                                                                   
|For the fiscal year ended December 31, 2002.
|                                             |                                                                                                   
|OR                                          
|                                            
|o                                            | TRANSITION
  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934         

For the transition period from _______________ to
_______________

Commission file number 000-29736

|Marnetics Broadband Technologies Ltd.                                            
|---------------------------------------------------------------------------------
|(Exact Name of Registrant as
  specified in its charter)                         
|Not applicable                                                                   
|(Translation of Registrants name into English                                   
|                                                                                 
|Israel                                                                           
|(Jurisdiction of
  incorporation or organization)                                
|                                                                                 
|10 Hayezira StreetRaanana 43000 Israel                                          
|(Address of principal
  executive offices)                                       
|                                                                                 
|Securities registered or to be registered pursuant to
  Section 12(b) of the Act:

|Title of eachClass |      | Name of each exchangeon which registered
|------------------ | ---- | ----------------------------------------
|                   | None |                                         

Securities registered to or to be registered pursuant to
Section 12(g) of the Act.

|Ordinary Shares, nominal value NIS
  0.08 per share
|---------------------------------------------------
|(Title of Class)                                   

Securities for which there is a reporting obligation
pursuant to Section 15(d) of the Act.

|None            
|----------------
|(Title of Class)

Indicate the number of outstanding shares of each of the
issuers classes of capital or common stock as of the close of the period
covered by the annual report.

As of December 31, 2002, 7,362,390 of
the Registrants Ordinary Shares, par value NIS 0.08 per share, were issued and
outstanding.

Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.

Yes X
No ___

Indicate by check mark which financial statement item
the registrant has elected to follow

Item 17 ___
Item 18 X

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TABLE OF CONTENTS

|PART I    |                                                                                  | PAGE
|--------- | -------------------------------------------------------------------------------- | ----
|          |                                                                                  |     
|Item 1:   | Identity of Directors, Senior Management and
  Advisers                          | 3   
|Item 2:   | Offer Statistics and Expected Timetable                                          | 3   
|Item 3:   | Key Information                                                                  | 3   
|Item 4:   | Information on the Company                                                       | 12  
|Item 5:   | Operating and Financial Review and Prospects                                     | 24  
|Item 6:   | Directors, Senior Management and Employees                                       | 32  
|Item 7:   | Major Shareholders and Related Party Transactions                                | 41  
|Item 8:   | Financial Information                                                            | 46  
|Item 9:   | The Offer and Listing                                                            | 49  
|Item 10:  | Additional Information                                                           | 51  
|Item 11:  | Quantitative and Qualitative Disclosures about
  Market Risk                     | 61  
|Item 12:  | Description of Securities Other than Equity
  Securities                         | 61  
|          |                                                                                  |     
|PART II   |                                                                                  |     
|          |                                                                                  |     
|Item 13:  | Defaults, Dividend Arrearages and Delinquencies                                  | 61  
|Item 14:  | Material Modifications to the Rights of Security
  Holders and
  Use of Proceeds | 61  
|Item 15:  | Controls and Procedures                                                          | 60  
|Item 16A: | Audit Committee Financial Report                                                 | 62  
|Item 16B: | Code of Ethics                                                                   | 62  
|          |                                                                                  |     
|PART III  |                                                                                  |     
|          |                                                                                  |     
|Item 17:  | Financial Statements                                                             | 62  
|Item 18:  | Financial Statements                                                             | 63  
|Item 19:  | Exhibits                                                                         | 63  

Reference
herein to the (1) Company, is to Marnetics Broadband Technologies Ltd., which may be referred
to as we, us or ourand unless context indicates otherwise,
includes its wholly-owned subsidiary, Marnetics, Ltd.and Marnetics
Ltd.s wholly-owned subsidiary Marnetics, Inc., and (2) referenced herein to Marnetics unless context indicates otherwise, refers to
Marnetics Ltd. and Marnetics Ltd.s wholly- owned subsidiary Marnetics, Inc..

BITmax and Prospera are trademarks of the Company. This annual report also
contains trademarks of other companies.

Note Regarding Forward-Looking Statements

Our disclosure and analysis in this report
contains statements relating to results  
including certain projections and business trends that are considered
forward-looking statements as defined in the Private Securities Litigation
Reform Act of 1995.  Without limiting
the foregoing, the words believes, anticipates, plans, intends,
expects and similar expressions are intended to identify forward-looking
statements. Such risks and uncertainties include, but are not limited to the
risks detailed under Item 3: Key Information Risk Factors. Actual results
may differ materially from those projected as a result of certain risks and
uncertainties, including but not limited to, changes in economic conditions and
competitive pressures within the Companys markets, as well as other risks and
uncertainties detailed from time to time in the filings of the Company with the
Securities and Exchange Commission. In addition, any forward-looking statements
represent estimates only as of the date this annual report was first filed with
the Securities Exchange Commission and should not be relied upon as
representing the Companys estimates as of any subsequent date. While the
Company may elect to update forward-looking statements at some point in the
future, the Company specifically disclaims any obligations to do so, even if
its estimates change.

3

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PART I

Item
1.             Identity of Directors, Senior Management and
Advisers

Not Applicable.

Item
2.             Offer Statistics and Expected Timetable

Not Applicable.

Item 3.             Key
Information.

A.         Selected
Financial Data

The following selected summary of financial
information was derived from our financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United
States. Effective December 31, 2000, Marnetics Ltd. was acquired by the Company
(formerly named Stav Electrical Systems (1994) Ltd.) in exchange for which the
Company issued to the shareholders and option holders of Marnetics Ltd. shares
and options in the Company representing approximately 75% of its outstanding
shares, on a fully diluted basis. The acquisition of Marnetics Ltd. by the
Company was accounted for as a reverse acquisition.  Marnetics Ltd. was determined to be the accounting acquirer in
the transaction since the former shareholders and option holders of Marnetics
Ltd., as a group, received the largest ownership interest in the Company. As a
result, the historical financial statements of the Company prior to December
31, 2000 were replaced with the historical financial statements of Marnetics.
The statement of operations for 2001 includes the operations of the Company and
of Marnetics. The statements of operations for 2000, and 1999 include only the
results of operations of Marnetics. The December 31, 2002, December 31, 2001
and December 31, 2000 balance sheet includes the consolidated accounts of the
Company and Marnetics.

As of
April 26, 2003, the Company decided to lay off the majority of the employees of
the Company and its wholly-owned subsidiary, Marnetics Ltd. in the areas of
marketing, sales and research and development. The remaining employees are in
the area of administration and will be left for the next few months, possibly
to the end of the year 2003.

The selected summary data should be read in
conjunction with Item 5:
Operating and Financial Review and Prospects, and as qualified
in their entirety by our Consolidated Financial Statements and Related Notes,
and Item 18  - Financial Statements,
including General - Note 1b, presented in United States dollars in accordance
with generally accepted accounting principles in the United States (U.S.
GAAP), and audited and prepared by Brightman Almagor & Co., Certified
Public Accountants (Israel), a member of Deloitte Touche Tohmatsu, independent
public accountants in Israel, 1 Azrieli Center, Tel Aviv 67201, Israel.

4

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|                                                                  |  |  | Year endedDecember 31,                 |  | Year EndedDecember 31, |           |      | Cumulative 
  from June 1,1998 to December 31, (1) |         
|----------------------------------------------------------------- |  |  | -------------------------------------- |  | ---------------------- | --------- | ---- | -------------------------------------------------- | --------
|                                                                  |  |  |                                        |  |                        |           |      |                                                    |         
|                                                                  |  |  | 2002                                   |  |                        | 2 0 01    |      |                                                    | 2000    
|                                                                  |  |  |                                        |  |                        |           |      |                                                    |         
|                                                                  |  |  | US $ in thousands                      | 
|Revenues                                                          |  |  | 19                                     |  |                        |          |      |                                                    |        
|Research
  and development costs                                  |  |  | 486                                    |  |                        | 812       |      |                                                    | 252     
|Sales
  and marketingexpenses, net                                |  |  | 464                                    |  |                        | 310       |      |                                                    | 142     
|General
  and administrative expenses                             |  |  | 784                                    |  |                        | 1,128     |      |                                                    | 722     
|Provision
  of legal claims                                       |  |  | (500)                                  |  |                        | 750       |      |                                                    |        
|Impairment
  ofGoodwill                                           |  |  |                                       |  |                        | 9,309     |      |                                                    |        
|Loss
  allowance on loan to related party                         |  |  |                                       |  |                        | 1,228     |      |                                                    |        
|Collection of loan fromrelated party                              |  |  | (266)                                  |  |                        |          |      |                                                    |        
|Write-down of investmentto affiliate                              |  |  | 522                                    |  |                        |          |      |                                                    |        
|Provision for a Bankguarantee                                     |  |  | 716                                    |  |                        |          |      |                                                    |        
|Non-cash
  compensation expenses                                  |  |  | 792                                    |  |                        | 805       |      |                                                    | 2,408   
|                                                                  |  |  |                                        |  |                        |           |      |                                                    |         
|                                                                  |  |  |                                        |  |                        |           |      |                                                    |         
|Operating loss                                                    |  |  | (2,979)                                |  |                        | (14,342)  |      |                                                    | (3,524) 
|                                                                  |  |  |                                        |  |                        |           |      |                                                    |         
|Financial
  income, net                                           |  |  | 32                                     |  |                        | 175       |      |                                                    | 167     
|Loss on sale of propertyand equipment                             |  |  |                                       |  |                        |          |      |                                                    |        
|Taxes inIncome                                                    |  |  | (74)                                   |  |                        |          |      |                                                    |        
|Share
  in losses of affiliate                                    |  |  |                                       |  |                        |          |      |                                                    | (639)   
|                                                                  |  |  |                                        |  |                        |           |      |                                                    |         
|Loss fromcontinuing operations                                    |  |  | (3,021)                                |  |                        | (14,167)  |      |                                                    | (3,996) 
|Discontinuedoperations:                                           |  |  |                                        |  |                        |           |      |                                                    |         
|Loss from
operations ofelectrical  division                       |  |  |                                       |  |                        | (450)     |      |                                                    |        
|Loss on sale of electricaldivision                                |  |  |                                       |  |                        | (2,278)   |      |                                                    |        
|                                                                  |  |  |                                        |  |                        |           |      |                                                    |         
|Loss for the period                                               |  |  | (3,021)                                |  |                        | (16,895)  |      |                                                    | (3,996) 
|                                                                  |  |  |                                        |  |                        |           |      |                                                    |         
|Per share
  data                                                  |  |  |                                        |  |                        |           |      |                                                    |         
|Basic and diluted:                                                |  |  |                                        |  |                        |           |      |                                                    |         
|Loss per share fromcontinuing operations                          |  |  | $ (0.41)                               |  |                        | $ (2.11)  |      |                                                    | $ (4.15)
|                                                                  |  |  |                                        |  |                        |           |      |                                                    |         
|Loss from discontinued
operations                                 |  |  | $                                     |  |                        | $ (0.40)  |      |                                                    | $      
|                                                                  |  |  |                                        |  |                        |           |      |                                                    |         
|Net loss                                                          |  |  | $ (0.41)                               |  |                        | $ (2.51)  |      |                                                    | $ (4.15)
|                                                                  |  |  |                                        |  |                        |           |      |                                                    |         
|Shares used incomputing loss perordinary share                    |  |  |                                        |  |                        |           |      |                                                    |         
|Basic and diluted                                                 |  |  | 7,362,390                              |  |                        | 6,725,685 |      |                                                    | 962,553 
|                                                                  |  |  |                                        |  |                        |           |      |                                                    |         
|                                                                  |  |  |                                        |  |                        |           |      |                                                    |         
|                                                                  |  |  | At
  December 31, 
  US $ in thousands |  |                        |           |     
|                                                                  |  |  |                                        |  |                        |          
|Balance Sheet Data                                                |  |  | 2002                                   |  | 2001                   |           | 2000 |                                                    | 1999    
|                                                                  |  |  |                                        |  |                        |           |      |                                                    |         
|Working capital                                                   |  |  | 3                                      |  |                        | 1,652*    |      |                                                    | 4,925   
|Total assets                                                      |  |  | 1,485                                  |  |                        | 3,451*    |      |                                                    | 25,376  
|Short term credits and 
  current maturities of long-
  term debt |  |  |                                       |  |                        | 50        |      |                                                    | 3,337   
|Long-term debt                                                    |  |  |                                       |  |                        |          |      |                                                    | 213     
|Shareholders equity                                              |  |  | 208                                    |  |                        | 2,437     |      |                                                    | 18,527  
|                                                                  |  |  |                                        |  |                        |           |      |                                                    |         

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5

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B.CAPITALIZATION AND
INDEBTEDNESS

Not Applicable.

C.REASONS FOR THE OFFER AND
USE OF PROCEEDS

Not applicable.

D.Risk Factors

General
Overview

The Companys operations during 2002
consisted of the core business of developing and marketing network capacity
enhancement and network information analysis solutions for IP networks or the
Network Business, which is handled through our wholly-owned subsidiary,
Marnetics Ltd. During 2002 the Company also dealt with some legal issues and
collection of debt relating to the Electrical
Business, which was sold during 2001. See Item 8B  Significant Changes.

Our business, operating
results and financial condition could be seriously harmed due to any of the
following risks. If we do not successfully address any of the risks described
below, we could experience a material adverse effect on our business, results
of operations and financial condition and our share price may decline. We
cannot assure you that we will successfully address any of these risks.

On
February 2,  2003 the American Stock Exchange
(AMEX or the Exchange), notified the Company that the Company no longer
complies with the Exchanges continued listing standards and therefore the
Companys Ordinary Shares are subject to being delisted from the Exchange. On February 9, 2003, the Company submitted a
request for an oral hearing before a committee of the Exchange in order to
appeal the Exchanges above determination. On March 27, 2003 the AMEX,
notified the Company of the decision of the Exchanges Listing Qualification
Panel (the Panel), which considered a request for review by the Company of
the AMEX staffs determination to prohibit the continued listing of the
Companys ordinary shares on the Exchange and initiate delisting proceedings
due to the Company not meeting the market value standard set forth in Section
1003(b)(i)(C) of the AMEX Company Guide (the Guide), in that the Companys
aggregate market value of shares publicly held is less than $1,000,000 for more
than 90 consecutive days, as well as the substantial period of time at which
the Companys Ordinary Shares have been selling for a low price per share
(Section 1003(f)(v) of the Guide).

Upon its review, at the request of the
Company, the Panel has agreed with the determination of the AMEX Staff that the
Companys ordinary shares should be delisted by the Exchange. In turn, the AMEX
applied to the SEC to strike the Companys ordinary shares from listing and
registration on the AMEX. The Company recently started trading on the Pink
Sheets, which are substantially less liquid and efficient. SeeItem 9B  Listing  Markets.

As of April 26, 2003, the Company decided to
lay off the majority of the employees of the Company and its wholly-owned
subsidiary, Marnetics Ltd. in the areas of marketing, sales and research and
development. The remaining employees are in the area of administration and will
be left for the next few months, possibly to the end of the year 2003. A new
updated budget was approved that reflects the reduction of the research and
development, and marketing and sales operations of the Company and Marnetics
Ltd.  The Company asked the assistance
of several investment bankers and consultants to evaluate the subsidiary, Marnetics
Ltd., in order to assist the Board of Directors regarding the possible sale of
Marnetics Ltd. or its technology. There is no guarantee the Company will find a
buyer for Marnetics Ltd. or its technology. See Item 8B  Significant Changes.

Risks
Relating to the Network Business

The Companys operations during 2002
consisted of the core business of developing and marketing network capacity
enhancement and network information analysis solutions for IP networks or the
Network Business, which is handled through our wholly-owned subsidiary,
Marnetics Ltd. See Item 8B  Significant
Changes.

6

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As of April 26, 2003, the Company decided to
lay off the majority of the employees of the Company and its wholly-owned
subsidiary, Marnetics Ltd. in the areas of marketing, sales and research and
development. The remaining employees are in the area of administration and will
be left for the next few months, possibly to the end of the year 2003.

Technological Factors; Uncertainty
of Product Development

Despite the fact that the Company during 2002
finalized the research and development of the second version of the family of
products of the Company and the fact that several installations and testings
were made, no assurances can be given that our investment in research and
development will be translated into marketable products. There can be no
assurance that any of our products including those in development will
satisfactorily perform all of the functions for which they have been designed
or that they will be reliable or durable in extensive applications. Such
efforts remain subject to all of the risks inherent in development of new
products, including unanticipated delays, expenses and technical problems or
difficulties, as well as the possible insufficiency of funds to implement
efforts, which could result in abandonment or substantial change in product
development. Our success will depend upon our products meeting targeted cost and
performance objectives and the timely introduction of products into the
marketplace. In order to obtain a strong market position, we must continue to
allocate substantial resources to research and development and since the
Company has reduced available funding in this area there is no guarantee that
we will have the necessary funds given the present financial situation of the
Company to be able to keep pace with the rate of technological change.

Intellectual Property Rights

Our success is substantially dependent upon
our proprietary software technology. We do not yet hold any patents related to
our software technology and currently rely or, in the future, expect to rely on
a combination of contractual rights, copyrights, trademarks, and non-disclosure
agreements with our employees, suppliers, distributors and customers. Marnetics
submitted patent applications on December 13, 2000 (US Patent Application No.
09/734,921), for a method of data transfer acceleration in a TCP network
environment, which is the core engine in BITmax, and on December 20, 2001 (US
Patent Application No. 10/022,912), for a method for enhancing physical
bandwidth capacity in packet-switched network (Discrete State Driven Queuing
(DSDQ) technology), which is the core technology to the Prospera family of
products. The patent applications are still pending. The methods used and
proposed for the protection of our intellectual property rights, however, may
not afford complete protection and there can be no assurance that third parties
will not independently develop such know-how or obtain access to our know-how,
ideas, concepts and documentation. Although we believe that our products have
been developed independently and do not infringe on the proprietary rights of
others, there can be no assurances that the technology does not and will not so
infringe or that third parties will not assert infringement claims against us
in the future.

In the case of infringement, we could, under
certain circumstances, be required to modify our products or obtain a license.
There can be no assurance that we would be able to do either in a timely
manner, upon acceptable terms and conditions, or at all, or that we will have
the financial or other resources necessary to defend successfully a patent
infringement or other proprietary rights infringement action. Failure to do any
of the foregoing could have a material adverse effect on us.  Furthermore, if our products or technologies
are deemed to infringe upon the rights of others, we could become liable for
damages, which would have a material adverse effect on us.

Risks Associated with Merger
Strategy and Sale of Marnetics Technology

General.  As a result of the termination of the day to
day activities of the Company beginning July 1, 2003, and as part of its
operating history and growth merger and acquisition strategy in the past, the
Company seeks to merge with other businesses. The Company has invited a
valuation from a well known consulting firm regarding the value of the assets
of Marnetics. The Company is continually seeking merger candidates in selected
and, if possible, synergetic markets and from time to time engages in
exploratory discussions with potential merger candidates.  Recently, during June 2003 the Company began
negotiations with a past distributor of Marnetics in Israel, regarding a merger
of the two companies and/or possible sale of the intellectual property assets
of the Marnetics. There can be no assurance, however, that the Company will be
successful in these negotiations or able to identify and merge with other
targeted businesses, sell Marnetics technology, or obtain financing for such
mergers on satisfactory terms.  Furthermore,
there can be no assurance that competition for merger candidates will not
escalate, thereby increasing the costs of making mergers unattainable. Further,
based on the terms established in the agreement and in accordance with
applicable law with the Office of the Chief Scientist of the State of Israel
the Company may not sell its intellectual property to a non-Israeli entity.

7

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Limited Knowledge and Operating History. 
Notwithstanding its own due diligence investigation, management may have
limited knowledge about the specific operating history, trends and customers of
businesses merged with in future acquisitions. 
Consequently, no assurance can be given that the Company will be able to
make future mergers at favorable prices, that merged with lines of business
will perform as well as they had performed historically or that the Company
will have sufficient information to analyze accurately the markets in which it
elects to merge with.  Furthermore,
additions by the Company of new products present certain risks and
uncertainties resulting from the Companys relative unfamiliarity with these
new products, the market for such new products, and the financial and operating
controls required to manage such new product offerings.  There can be no assurance that the Company
will be successful in marketing these or other additions to its product
offering or that its existing customers will accept such additions to the
products currently purchased from the Company.

Integration.  The process of integrating future merged
with businesses into the Companys operations may result in unforeseen
difficulties and may require a disproportionate amount of resources and
management attention.  Although the
Company will endeavor to integrate and assimilate the operations of merged
lines of business in an effective and timely manner, no assurance can be given
that the Company will be successful in such integration attempts or that the
Company will be able to hire, train, retain and assimilate individuals employed
at the merged businesses.  Further, no
assurance can be given that the Company will successfully integrate its recent
acquisitions or any other future merged businesses into the Companys
purchasing, marketing and management information systems, or that the Companys
management and financial controls, personnel, computer systems and other
corporate support systems will be adequate to manage the increase in the size
and scope of the Companys operations and merger and acquisition activity.  Integration of mergers is often a complex
process which may entail material, non-recurring expenditures, including
facility closing costs, warehouse assimilation expenses, asset write- downs and
severance payments.

Limited Relevant Operating
History of Marnetics

Marnetics, which is the operating entity for
the Network Business, has been in operation since June 1998. Accordingly, the
Marnetics Subsidiary has a limited relevant operating history upon which an
evaluation of the Marnetics Subsidiarys performance and prospects can be
made.  The Marnetics Subsidiary is
subject to all of the risks, needed financing, expenses, delays, problems, and difficulties
typically encountered in the establishment of a new business, especially a
development stage company.

In early 2001, the global telecommunications
markets experienced a major decline.  As
a result of the downturn, the deployment of broadband Internet access slowed
dramatically, putting in jeopardy Marnetics Ltd.s business plan, which
primarily targeted the broadband market. As
a result thereof, Marnetics Ltd. shifted its technological focus and is
developing products, the Prospera family of products, that intend to provide
network capacity enhancement solutions for a bottleneck that may occur when Local Area
Network (LAN)
access meets the congested Wide
Area Network (WAN) (the WAN Access Link) as well as network traffic analysis
and capacity planning. At the end of year
2002 Marnetics completed the final development of the second version family of
products and began sales.

As of April 26, 2003, the Company decided to
lay off the majority of the employees of the Company and its wholly-owned
subsidiary, Marnetics Ltd. in the areas of marketing, sales and research and
development The remaining employees are in the area of administration and will
be left for the next few months, possibly to the end of the year 2003.
Therefore there are existing risks regarding the continuation of the operations
of the Company.

Market for
the Technology

The market for network capacity enhancement
solutions is in an early stage of development and its success is not
guaranteed. Therefore, we cannot accurately assess the size of the market, the
products needed to address the market, the optimal distribution strategy, or
the competitive environment that will develop. In order for us to be
successful, our potential customers must recognize the value of our new
approach to network management solutions, and decide to invest in the
management of their networks and the performance of mission critical
applications. The growth of the network management solutions market also
depends upon a number of factors, including the availability of inexpensive
bandwidth, especially international links, and the growth in complexity of WAN,
and the CapEx budgets of enterprises. As of April 26, 2003, the Company decided
to lay off the majority of the employees of the Company and its wholly-owned
subsidiary, Marnetics Ltd. in the areas of marketing, sales and research and
development. Therefore given the lack of funding, there is a risk that the
products of Marnetics Ltd. cannot continue to be marketed.

8

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Competition;
Pricing; Technological Obsolescence

Our products may compete directly with, or be
rendered obsolete, by products developed and marketed by numerous
well-established companies in the communications and networks industries,
including traffic management developers, network optimization solution
developers and system integrators. Increased competition could result in
reduced prices and gross margins for our products and could require increased
spending by us on research and development, any of which could harm our
business. Many of these competitors have substantially greater financial,
technical, personnel and other resources than the Company and have established
reputations for success in the development, licensing, and sale of their
products and technology. Certain of these competitors are industry leaders with
the financial resources necessary to enable them to withstand substantial price
competition or downturns in the market. Thus, our products may come under
competitive pressure in terms of feasibility and price with a negative impact
on future performance. The Company forecasts that the prices of bandwidth will
not go down lower substantially, but if the prices were in actuality to go
lower substantially, this would have a negative impact upon the products of
Marnetics Ltd. There are also numerous other companies that have developed or
may be expected to develop technologies or products that may be functionally
similar to some or all of those being developed by us.  There can be no assurance that other
companies with greater financial resources and expertise do not have or are not
currently developing functionally equivalent or superior products, or that
functionally equivalent or superior products will not become available in the
near future. In addition, the markets for our technology, products and proposed
products are characterized by rapid changes and evolving industry standards,
often resulting in product obsolescence or shortened product life span.

Accordingly, our ability to compete will be
dependent upon our ability continually to enhance and improve our future
products and technologies, and to complete development of new products. There
can be no assurance that we will be able to compete successfully, that our
competitors or future competitors will not develop technologies or products
that will render our products and technology obsolete or less marketable, or
that the Company will be able to successfully enhance or satisfactorily adapt
our existing technology or develop new products. Given the lack of funding and
reductions of efforts in research and development in Marnetics during year 2003
this will have a negative impact on Marnetics and the ability to be
competitive.

Significant Capital
Requirements; Need for Additional Financing; Dependence on
              
           
Financing to
Implement Expansion

The Companys capital requirements have been
and will continue to be significant. Our cash requirements have historically
exceeded cash flow from operations which was negative and the cash position of
the Company will continue to be a major risk factor. The Company has budgeted
enough cash for operations of the Company until September 2003. As a result, we
may need to depend upon bank credit lines and sales of the Companys securities
to fund our development and marketing activities. The Companys ability to
obtain additional financing, and the terms of any such financing, could be
adversely affected by a variety of existing circumstances.  No assurance can be given that the Company
will be able to obtain such financing or that the financing obtained will be on
terms satisfactory or favorable to the Company, and as such the Company would
be forced to cease operations and close down.

Office of
the Chief Scientist and other Government Programs which may be Discontinued
                  
       
or
Reduced and effect on Sale of Technology of Marnetics

The
Company received funding under Government of Israel programs. In order to
maintain our eligibility for these programs, we must continue to meet specified
conditions and pay royalties with respect to grants received. In addition, some
of the Office of the Chief Scientists programs restrict our ability to
manufacture particular products or transfer particular technology outside of
Israel. If we fail to comply with these conditions in the future, the benefits
received could be canceled and we could be required to pay back the grants with
penalties. The Government of Israel has reduced the benefits available under
these programs in recent years and these programs may be discontinued or
curtailed in the future. If the Government of Israel ends these programs, our
business, financial condition and results of operations could be materially
adversely affected. SeeItem 4.B. Business Overview  Research and Development.

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Limited Marketing Capabilities;
Dependence on Third Party Marketing Arrangements

During 2003, the Company through Marnetics
Ltd. had commenced marketing activities relating to product commercialization.
It had limited marketing experience and limited financial, personnel and other
resources to undertake extensive marketing activities independently.
Accordingly, we relied on arrangements with third parties for the marketing and
distribution of our products, including arrangements with distributors. The Company
terminated these agreements during year 2003.

Given the reduction in employees and limited
budgeted funding up until September 2003, there can be no assurance that we
will be able, for financial or other reasons, to continue to finalize any
additional third party distribution, marketing, or joint venture arrangements
or such arrangements, if finalized, will result in the successful
commercialization of any of our products.

Reliance
on International Sales

The Company had anticipated having sales in
Israel and in international markets, but given the reduction in employees,
limited budgeted funding until September 2003, and termination of various
marketing and consulting agreements overseas, there can be no assurance that we
will be able to do so or that such international markets will be viable.

Currency
Exchange Risks Associated with International Sales and Cash Balance

Limited revenues to date are derived in
United States dollars, most of the cash balance invested in related deposits,
while a significant portion of our expenses are currently incurred in NIS.
Therefore, the Company may be adversely affected by fluctuations in currency
exchange rates. We have not engaged in currency-hedging transactions intended
to reduce the effect of fluctuations in foreign currency exchange rates on our
results of operations. Even if we were to determine that it was in our best
interests to enter into any such hedging transactions in the future, there can
be no assurance that we will be able to do so or that such transactions, if
entered into, will materially reduce the effect of fluctuations in foreign
currency exchange rates on our results of operations.  Over the year 2003 the dollar has weakened almost nine percent
against the New Israeli Shekel going from NIS 4.737 as of December 31, 2002, to
one United States dollar to NIS 4.40 to one United States dollar. Any further
changes in the exchange rate of dollar against the New Israeli Shekel could
have a material adverse effect on our operations. In addition, the imposition
of exchange or price controls or other restrictions on the conversion of
foreign currencies into NIS may have a material adverse effect on our results
of operations.

Potential
Product Liability; Warranty Expense

Despite the fact that the company performed
routine basis tests of its products, though possible new products, if any, may
contain errors after commencement of commercial shipment. Additionally, the
companys products,in order to perform, depend upon certain
third party hardware and software, which may contain errors and defects that
could reduce the performance of the companys products. As a result, the
Company may be exposed to potential product liability claims, experience future
material warranty expense, by our customers, distributors and users of our
products, and not have adequate funds or personnel for providing
maintenance.

Dependence
on Key Personnel

As of April 26, 2003, the Company decided to
lay off the majority of the employees of the Company and its wholly-owned
subsidiary, Marnetics Ltd. in the areas of marketing, sales and research and
development. The remaining employees are in the area of administration and will
be left for the next few months, possibly to the end of the year 2003.

The Company is dependent on the abilities and
continued personal efforts of Marnetics Ltd.s senior management, particularly
those of Menachem Reinschmidt, Founder of Marnetics Ltd. and Chairman of the
Board of the Company whose consulting agreement is subject to renewal, David
Sheetrit the present acting Chief Executive Officer, previous Chief Operating
Officer of the Company and Director in the Company since April 2003, and Hanoch
Newman, Vice President of Research and Development of Marnetics Ltd. who is
finishing June 2003 but will possibly be available for part time assistance
dependent on some discussions the Company is having presently with him.

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The Board of Directors has approved the
continuation of the consulting agreement until December 2, 2003 with Menachem
Reinschmidt, subject to shareholder approval, and the appointment of David
Sheetrit as acting Chief Executive Officer, previously Chief Operating Officer
of the Company since January 2001 and Director in the Company since April 2003,
under the same terms and conditions of his existing service agreement. These
consulting agreements are terminable on relatively short notice. The loss of
the services of these key personnel would have a material effect on our ability
to manage the on-going operations, and to develop or commercialize our products
and technologies.

Regulation

Where applicable and if possible given the
limited operations and funding of the Company, and by way of a merger or
otherwise, we intend to supply the Companys products to customers located
throughout the United States and in several foreign countries.  As a result, the Company may be required to
qualify to do business, or be subject to tax or other laws and regulations, in
these jurisdictions even if it does not have a physical presence or employees
or property in these jurisdictions.  The
application of these multiple sets of laws and regulations is uncertain, but we
could find the Company is subject to regulation, taxation, enforcement or other
liability in unexpected ways, which could materially adversely affect our
business, financial condition and results of operations.

Control by
Principal Shareholders

As of May 31, 2003, our Executive Officers
and Directors and principal shareholders 
beneficially own an aggregate of 63.9% of the Companys Ordinary Shares
on a fully diluted basis (based on vested option, not taking into account unallocated
options and options granted but not vested). Such Shareholders, if voting
together, would likely have sufficient voting power to elect a majority of the
Board of Directors, exercise control of the business, policies and affairs of
the Company and, in general, determine the outcome of any corporate transaction
or other matter submitted to Shareholders for approval such as:  (i) any amendment to the Companys
Articles of Association, (ii) any merger, consolidation, sale of all or
substantially all of the assets of the Company and (iii) any privatization  transaction, and in general prevent or cause
a change in control of the Company, all of which may adversely affect the
Company and its Shareholders.  In
addition, certain shareholders have the right to appoint members of the Board
of Directors.  Although certain
shareholders are contractually obligated to vote for certain director nominees,
there is no joint ownership of the shares held by such shareholders under
Israeli law and such shareholders do not constitute a controlling group under
Israel corporate and securities laws , and thus are not bound to vote together
as a group.  See Item 6A  Directors and Senior Management
and Item 7-Major Shareholders and
Related Party Transactions.

Risks Relating to Collection of Debt to the
Company

Effective
March 2001 the Company sold to Idan Millenium Investments and Assets Ltd.
(IDAN), a company under the control of Dov Strikovsky, a major shareholder and former President,
Chairman and CEO of the Company, all the fixed assets, inventories, other assets and liabilities and
related goodwill, in the amount of an appraised value of $2,000,000, relating
to the electrical operations, for a consideration of $597,000. The
consideration is payable in 25 monthly installments of $24,000 commencing
February 1, 2002. In May 2002 the Company signed an addendum with IDAN to
change the terms of payments to such that the first 11 installment will be
reduced to $7,000 each and the remaining 14 installments will be of $37,000.
The Company, considering the collectibility probability, decided to establish
an allowance on the amount not yet collected. During 2002 $71,000 were repaid
on the account of the sale consideration. See Item 7B  Related Party Transactions.

In
prior years the Company granted loans to Mr. Strikovsky in the amount of
$1,228,000. The loan was linked to the Israeli CPI and bore interest of 2% per
annum and was repayable in eight annual installments each comprised of 1/8 of
the principal and the accrued interest thereon commencing December 2000. At
December 31, 2001 the Company reassessed the collectibility of the loan in
accordance with provisions of SFAS No. 114 Accounting by Creditors for
Impairment of a Loan, and resolved, considering the probability of its
collectibility, to establish a loan loss allowance for the entire amount.
Income from impaired loan will be recorded using the cash method. During 2002
$142,000 were repaid on the account of the loan.

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To
secure his obligations under the various agreements Mr. Strikovsky has
collateralized 300,000 shares that he owns of the Company. No other payments
were made by Mr. Strikovsky subsequent to December 31, 2002. The Company has
initiated legal efforts aimed at collecting amounts due from Mr. Strikovskyand
the companies under his control. See Item 7.B.  Related Party Transactions  Indemnification by
Significant Shareholder.

On May 9, 2001 an agreement (the Bank Agreement) was signed between
the Company and Bank Hapoalim, Ltd. (the Bank) with respect to the Companys
debt to the Bank in the amount of $3,127,000 (the Debt). In accordance with
the Bank Agreement, the Bank has agreed to release the Company from its
obligation to repay the Debt and to cancel the floating charge and liens
registered in favor of the Bank on properties of the Company provided that, by
May 31, 2001 the Company shall pay $954,000 to the Bank on account of the Debt
(the Repaid Amount) and in addition the Company shall have assigned to the
Bank all its rights with respect to the debt of the municipality of Hod
Hasharon to the Company in the amount of 
$2,173,000. The Company paid the $954,000 and made the assignment in the
aforesaid amount.

In addition, the Company has provided the Bank with a guarantee
of up to $716,000, which decreases in the ratio of NIS 1:2 paid on account of
the outstanding debt of Hod Hasharon, which has been assigned to the Bank (Note
3b). To date Hod-Hasharon has not made any re-payment on account of the debt,
and therefore the guarantee has not decreased. According to the terms of the
Bank Agreement, following November 30, 2002, the Bank is entitled to exercise
the outstanding amount of the guarantee, and since the guarantee has not
decreased, the Company decided to establish an allowance for the guarantee in
full. Nevertheless, the Company and
its representatives are conducting on-going negotiations with Hod-Hasharon for the repayment of the debt to the
Bank, although at present the Company cannot assess what portion of the debt
will be recovered, if any, (and the guarantee decreased accordingly) as a
result of such negotiations, or any future action by the Company. See Item 8A - Legal Proceedings.

Failure
to collect the total amounts, or part of it, from Idan Millenium Investments
and Assets Ltd, Mr. Dov Strikovsky and the municipality of
Hod Hasharon has a major negative impact on the Companys future
cash flow and liquidity.

Risks Relating to Legal Proceedings

The Company and Mr.
Strikovsky was named as a defendant in a claim for specific performance of an
agreement entered into by the Company and the plaintiff in April 1999 (the
Agreement) as well as damages as a result of a breach of the agreement. On
July 2, 2001, due to the fact that no defense and/or reply was provided by the
Company or Mr. Strikovksy, judgment was entered against the Company in the
amount of $725,000. On February 7, 2002 the Company and Mr. Strikovsky filed a
motion to vacate the judgment and on February 27, 2002 the court rejected the
motion. The Company filed an
appeal on the court decision which was accepted by the Supreme Court of the
State New York with instructions to allow evidentiary hearing. The hearing was
held on May 22, 2003 and the Company is awaiting the courts decision. The
plaintiff proposed to settle the suit for
$250,000 and while the Company was willing to further negotiate a substantially
lower amount, in light of the plaintiffs position the Company decided to
reject the proposal. In 2001 the Company has established an allowance in the
amount of $750,000 to provide for its possible exposure. In light of recent
developments the Company decreased the allowance by $500,000 to $250,000 which,
in light of the judgment against the Company and the settlement offer proposed,
represents a conservative estimate of the probable exposure. See Item 8A (1)  Financial Information -Legal Proceedings.

Failure
to successfully eliminate the judgment and the lawsuit against the Company, in
relatively short time, will have a major negative impact on the
Companys future cash flow and liquidity.

Risks Relating to Marnetics Location in
Israel

Risk of Political Instability.  Our
principal offices and the research and development facilities of the Company
are located in Israel and, thus, are directly affected by economic, political
and military conditions in Israel. Since the establishment of the State of
Israel in 1948, a state of hostility has existed, varying in degree and
intensity, between Israel and various Arab countries. In addition, Israel and
companies doing business with Israel have been the subject of an economic
boycott by the Arab countries since Israels establishment. Although Israel has
entered into various agreements with Egypt, Jordan and the Palestinian
Authority and various declarations have been signed in connection with efforts
to resolve some of the aforementioned problems, no prediction can be made as to
whether a full resolution of these problems will be achieved or as to the
nature of any such resolution.  Since
October 2000, there has been a substantial deterioration in the relationship
between Israel and the Palestinians, which has resulted in increased violence.
Israel has experienced terrorist incidents within its borders, including in
Judea, Samaria and Gaza. As a result, negotiations between Israel and
representatives of the Palestinian Authority ceased. The future effect of this
deterioration and violence on the Israeli economy and our operations is
unclear. Ongoing violence between Israel and Palestinians have a material adverse
effect on our business, financial conditions and results of operations.

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History of Inflation. In the early to mid-1980s, Israels economy was subject to a period of
very high inflation. However, inflation was significantly reduced by the late
1980s due primarily to government intervention. The annual rate of inflation in
Israel was 7.0% for 1997, 8.6% for 1998, 1.3% for 1999, 0% for 2000, 1.4 % for
2001, and from January 2002 to May 2002 was 4.9%. The dollar carrying value
of certain assets and liabilities of the Company, which are denominated or
payable in NIS, are influenced by the rate of inflation in Israel compared with
that of the United States and prevailing NIS/dollar exchange rates. Increases
in inflation in Israel could have an adverse impact on our results of
operations if the rate of inflation increases without a corresponding
devaluation of the NIS against the dollar.

Military Reserve Duty. Certain of our officers and employees are currently obligated to
perform annual reserve duty in the Israel Defense Forces and are subject to
being called for active military duty at any time and are obligated to perform,
dependent on rank, up to 36 days of military reserve duty annually. Additionally,
all such residents are subject to being called to active duty at any time under
emergency circumstances. We have operated effectively under these requirements
since our inception though no assessment can be made as to the full impact of
such requirements on our remaining workforce

Income Taxation. Non-residents of Israel are subject to income tax on certain income
(including cash dividends) derived from sources in Israel. The convention
between the State of Israel and the federal government of the United States
with respect to taxes on income provides for a maximum tax of 25% on dividends
paid to residents of the United States.

| | It May Be Difficult to Enforce a United States Judgment
  Against the Company, its Officers and Directors in this Annual Report or to
  Assert United States Securities Laws Claims in Israel or Serve Process on
  Our Officers.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We are incorporated in Israel. Most of our
executive officers and directors named in this annual report are nonresidents
of the United States, and a substantial portion of our assets and the assets of
these persons are located outside the United States. Therefore, it may be
difficult to enforce a judgment obtained in the United States based upon the
civil liabilities provisions of the United States Federal securities laws
against us or any of those persons or to effect service of process upon these
persons in the United States. Additionally, it may be difficult for individuals
to enforce civil liabilities under United States federal securities laws in
original actions instituted in Israel.

Item 4.Information on the Company

A.         History
and Development of the Company

The Company was formed
in 1994 as Stav Electrical Systems (1994) Ltd., a private company established
in the State of Israel.  From 1994
through 2000, the Company was an electrical and lighting contracting and
engineering firm engaged in the installation and maintenance of infrastructure
works located in the State of Israel.

During December 1998,
the Company consummated an initial public offering pursuant to which the
Company sold 800,000 ordinary shares (including 100,000 ordinary shares sold by
Mr. Dov Strikovsky, a former director and officer of the Company) for net
proceeds of approximately $3.6 million.

On June 1, 2000 a share exchange agreement
was signed between the Company and Marnetics. The agreement was consummated
after final approval of the Companys shareholders on December 20, 2000,
whereby the Company completed a combination transaction with Marnetics whereby
the Company changed its name to Marnetics Broadband Technologies Ltd.  The Company acquired all of the outstanding
share capital of Marnetics, an Israeli company formed in 1998, and Marnetics
shareholders received Ordinary Shares and options representing approximately
75% of the Companys outstanding Ordinary Shares and options on a fully-diluted
basis. Marnetics became a wholly owned subsidiary of Marnetics Broadband
Technologies Ltd. as a result of this transaction.  The Company issued 4,993,048 Ordinary Shares and 1,761,236
options (including 308,300 newly unvested options to employees of Marnetics) in
connection with the transaction, and decided to reserve for the Employee Stock
Option Plan 1,000,000 options.  As a
result of this transaction, the Company changed its focus from electrical
contracting to the development and marketing of broadband Internet fortification
solutions, designed to enhance performance and infrastructure utilization in
the broadband Internet environment. In June
2001, due to changes in the broadband Internet market, the Company subsequently
changed its technological focus as described in subsection B below.

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In February 2000,
Marnetics issued 130,719 ordinary shares of NIS 0.01 par value to ECI Telecom
Ltd. for $2,000,000. In October 2000 Marnetics reached an agreement with a
group of new investors (the Investors). In accordance with the agreement,
Marnetics issued to the Investors 221,200 ordinary shares in consideration of
$5,076,000.

Effective March 2001,
the Company sold to Idan Millenium Investments and Assets Ltd. (IDAN), a company
under the control of Dov Strikovsky, a major shareholder and President, Chairman and former CEO of the Company, all the fixed assets,
inventories, other assets and liabilities and related goodwill, in the amount
of an appraised value of $2,000,000, relating to the electrical operations, for
a consideration of $597,000. See Item 7B  Related Party Transactions.

During 2001, the Company changed the
direction of its technology from its core business of developing and marketing
broadband Internet fortification solutions to the development and marketing of
network capacity enhancement and network information analysis solutions for IP
networks or the Network Business.

During December 2001
the Company nominated Mr. Menachem Reinschmidt to the position of CEO of the
Company.

During December 2002,
the Company nominated Mr. Menachem Reinschmidt to the position of Chairman of
the Board of the Company and elected new directors.  At the end of June 2003, David Sheetrit, Director in the Company
since April 2003 and Chief Operating Officer since January 2001, became Acting
Chief Executive Officer of the Company. See Item 6 -Directors, Senior Managers
and Employees.

As of April 2003, the Company decided to lay
off the majority of the employees of the Company and its wholly-owned
subsidiary, Marnetics Ltd.

Our principal executive
offices are located at 10 Hayezira St., Raanana 43000 Israel, and our
telephone number is ++ 972-9-761-6868.

B.           Business
Overview

The Companys operations during 2002
consisted of the core business of developing and marketing network capacity
enhancement and network information analysis solutions for IP networks or the
Network Business, which is handled through our wholly-owned subsidiary,
Marnetics Ltd. During 2002 the Company also dealt with some legal issues and
collection of debt relating to the Electrical Business, which was sold during
2001. SeeItem
8B  Significant Changes.

As of April 26, 2003, the Company decided to
lay off the majority of the employees of the Company and its wholly-owned
subsidiary, Marnetics Ltd. in the areas of marketing, sales and research and
development The remaining employees are in the area of administration and will
be left for the next few months, possibly to the end of the year 2003. The
remaining employees will concentrate on selling the Marnetics or its technology.

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NETWORK
BUSINESS

General

The Companys operating
subsidiary, Marnetics Ltd., was in the stage of commercialization of its
products developed between the period 2001 through (or until) June 2003. In early 2001, the global telecommunications
markets experienced a major decline.  As
a result of the downturn, the deployment of broadband Internet access slowed
dramatically, putting in jeopardy Marnetics business plan, which primarily targeted
the broadband market. As a result thereof,
Marnetics Ltd. shifted its focus and developed a platform of products which it
called the Prospera family of products, which are intended to provide network
capacity enhancement and analysis solutions for bottlenecks that may occur
especially when local area networks (LAN) meet the congested wide area
network (WAN) (the WAN Access Link), thereby decreasing the usability
and productivity of revenue generating mission critical applications.

Industry
Background and Market Opportunity

Current priorities in IP networks management
are focusing on better utilization of existing infrastructure, improvement in
performance and providing a quality of service level that can generate revenues
or reduce costs. The Companys objective is to utilize its existing technology
and integrate it into a platform of solutions that addresses these current
market priorities.

Enterprises expect mission-critical
applications to run quickly and reliably, with predefined performance. Many
applications running simultaneously can often cause congestion within the
network especially in the routers, leading to variations in network
availability that range from slow performance to denial of service. In such
instances enterprises require that revenue generating mission-critical
applications be allowed to function without delays created by less significant
traffic and bandwidth-hogging Internet applications such as heavy downloads,
music files, streaming media, and other non-critical applications.

The advent of the Internet and the explosive
growth of time-sensitive and revenue generating mission-critical applications
such as ERP, CRM, Databases, etc., as well as Intranets, Extranets and the Web,
are creating intense strain on IP networks. This is particularly prevalent at
the interface links between the very fast 100Mbps-1Gbps Ethernet LAN and the
much slower channels of frame relay, ATM, leased lines and VPNs of the WAN (usually
holds a bandwidth of up to 2Mbps).

Heavily congested networks cause a
deterioration in the end-user experience, with peak traffic conditions and the
unbalanced use of resources creating a snowball effect, resulting in
compromised mission-critical application availability and causing events such
as insufficient response time, server slowdown, bottlenecks and poor overall
network performance.

Whilst the network and bandwidth management
mechanism are of importance, it should be recognized that a networks
architecture is designed to serve applications and users and not to deal with
bandwidth-hungry applications, peak-time congestion packet losses or other
adverse symptoms created by the unbalanced use of its resources.

When considering the problem of how to
improve mission-critical application performance it is necessary to concentrate
on network congestion and those resources that have the greatest impact on the
network when under intense strain or failure. The busy interface between the
WAN and LAN affects network capacity, performance and availability more than
any other point on the network, as it is through this point that those
bandwidth-hungry, non-critical applications impact network resources. At this
interface, there are typically frequent congestion and capacity problems, as
heavy downloads and surfing congest routers, saturate links, exhaust buffers
and flood servers - compromising both the health and availability of the
network and those applications running over it.

To adequately address this, the objective of
any solution should not be just to improve the overall performance of the
network, but to fortify and accelerate those mission critical applications that
require precedence over resource-consuming applications while maintaining
acceptable economical cost effective ratios.

Existing
Alternative Solutions

Because of the congested WAN access links,
enterprises tend to add infrastructure until over-provisioning the network.
This requires expensive upgrades to LAN and WAN infrastructure and associated
network equipment. Moreover, incremental increases in infrastructure only
temporarily alleviate network congestion, leaving the following problems
unresolved: over-provisioning results in under-utilization of the network
during non-peak periods; deployment costs and increased recurring service
charges become expensive, especially for networks with many remote sites and
for international networks; and there is no application performance visibility
to enable effective capacity planning.

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There are several distinctly different types
of solutions currently available that attempt to address application and
network performance issues, such as:

Caching-Web Caching is the act of storing copies of
Web pages on a local system. If the same pages are requested at a later time,
and the cached copy is still valid, there is no need to contact the origin
server again. These cache hitscan
reduce latencies and network bandwidth, although there is no congestion
handling or control of oversubscription as caching is designed mainly to reduce
link traffic. The main drawback, however, is that most of the caching devices
are HTTP oriented by design and do not support other significant high volume
applications such as FTP and email. In addition to that, the cache algorithm is
based on statistical algorithm, therefore limited to the actual hit ratio for
every type of traffic. The efficiency for software downloading, music files,
video streaming and cryptic files would be very limited.

Bandwidth Management (also called Quality
of Service Solutions)-Bandwidth
management is, in essence, discrimination between session and user types to
assist in delivering higher quality of service for specific users or
applications. Although this can provide limited relief to congested networks
the initial implementation is highly problematic, requiring labor-intensive
tailoring to exact individual network specifications. Ongoing maintenance is
similarly cumbersome as this type of solution is highly-sensitive to changes on
the network, requiring re-configuration and re-building whenever network
modifications or upgrades are carried out.

Compression/Decompression Data compression was very effective in the
past, specifically with certain types of files, such as text files. However,
data compression has lost its value in todays corporate environment, as it is
not effective when it comes to random data such as the documents used by
enterprises today  wording files, presentations, spreadsheets, images, and zip
files.When porting data
compression to real-life packet-based networks, vendors, as well as users, have
found that data compression is less effective. The reason behind this is that
corporate networks and Internet technologies, usually carry pre-compressed material,
and packets usually carry very little resemblance to prior packets.
Implementing of compression products requires two sides installation,
thus complicating the installation process. The cost of such solution would be
very high, since installation would have to be not only in the data center but
also in the remote branches.

Purchasing Additional
Bandwidth-Until recently certain
network slow-down symptoms have been interpreted as an indication of bandwidth
shortage, resulting in additional, extremely costly, WAN trunk bandwidth being
purchased as an appropriate solution to the problem. Although increasing
bandwidth can provide marginal relief to a network, accumulated experience has
shown that additional bandwidth does not fundamentally change the situation as
increasing bandwidth only serves to allow aggressive users/applications to
disproportionately consume the additional resources, compounding both the
problem and the relative costs involved.

Our Products
and Services  Prospera family of products

Prospera, Marnetics product line, is an
innovative Capacity Enhancement Platform, which improves bandwidth utilization
and enables more subscribers to be served simultaneously over the Wide Area
Network. Prospera addresses one of the fundamental problems of communication
networks: capacity and scalability, especially in high-volume traffic
situations.  Prospera solves the
problem of mission-critical application performance on congested IP networks by
fortifying and accelerating applications such as ERP and CRM in a fully
adaptive and automatic manner. The product is intended to better manage
over-subscription situations in Internet and Intranet networks. As a result,
users of Prospera save money by delaying additional bandwidth purchases, while
improving the quality of service level and customer satisfaction.

As of today, the Prospera family of products
comprises two main products:

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The Prospera MegaLink (a
software solution) - A
Network Capacity Enhancement solution aimed towards service providers and
enterprises. It introduces a new, comprehensive approach to IP network capacity
challenges, mission critical application protection and maximizes network
infrastructure utilization by increasing the effective capacity, enabling
enterprises and Service Providers to provide better service to their customers
at lower costs. Complimenting the Prospera MegaLink, is the Prospera CisMate
(a hardware solution), a router companion device specifically designed for
resolving problematic network congestion situations and optimizing the actions
of the Cisco router in the network while enabling mission critical data
applications.

ADSL
FreeFlow (a limited functionality software solution), aims to solve
the problem of a very narrow upload link in ADSL lines used especially in SOHO
(small office, home office) by allowing critical application such as HTTP to
send acknowledgements to remote servers and as a result continue the sessions.

The Prospera Expert - A Network Information System that brings a
new approach to network performance and capacity monitoring and analysis for
service providers and enterprises. The commercial version of Prospera Expert
(V2.1) is complete.

Further, Marnetics has launched an ISP Rating tool through which consumers
will be able to compare the performance of the various ISPs operating in Israel
and also serve as a marketing/reference site for the capabilities of the
Prospera Expert.

Prospera MegaLink

Marnetics has developed a cost-effective,
enterprise-class application-acceleration and network capacity enhancement
technology based on the patent pending DSDQ (Discrete State Driven Queuing)
technology that offers a new and comprehensive approach to the challenges of
saturated IP Networks and the performance of mission-critical applications.

Aimed at enterprises, Internet related
service providers and cellular carriers of all types, Prospera MegaLink is a
technology that protects both the user and mission-critical application in
peak-load times, dynamically adapting to the various network conditions to
enable mission-critical applications to run significantly faster, smoother, and
with greater availability.

Through protecting key network resources in
over-subscription situations, Prospera MegaLink delivers streamlined capacity
and performance distribution that allows more users and applications to
simultaneously share network resources as well as improving the overall health
and stability of the network. It is a scalable, software-based solution that
reflects as a standard network device, making it easy to install, manage and
upgrade configurations, as well as system management and traffic analysis
functionality.

Market Positioning

To the best knowledge of the Company, Marnetics
technology stands apart from other solutions in that it specifically addresses
the problem of performance on congested IP networks. It uniquely fortifies and
accelerates those specific applications that are vital to the smooth running of
the enterprises operations by increasing the number of concurrent sessions. In
fact, in instances where mission-critical applications, such as CRM, are an
inherent part of the enterprises core business, Marnetics solution can provide
a significant performance advantage over the competition as well as greater
user satisfaction and operational profitability.

The Technology

Prospera MegaLink is built on a
patent-pending, state-of-the-art and intelligent traffic and application-optimization
engine, DSDQ that actively monitors and manages resources and applications on a
per-session basis. DSDQ dynamically adapts to different traffic patterns
(states) and end-to-end session conditions, enabling streamlined performance and
availability of mission-critical applications and network resources.

Designed to effectively handle different
dynamic mixtures of traffic, DSDQ offers real-time session optimization, relief
and recovery from extreme congestion situations, fast recovery from packet-loss
and dynamic balancing between sessions, bandwidth-consumption and other network
events that influence the utilization and efficiency of mission-critical
applications and network resources. Prospera MegaLink is independent of upper
layer protocols and physical trunk line infrastructure and supports multi link
and multi channel environments, within the WAN topology, from a single box.
Installed at the site of the network data center (typically housed at the
enterprise headquarters) it supports all trunks from this focal point to the
other locations/remote branches.

17

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Mission-critical application protection and
capacity enhancement are achieved through the employment of Prospera MegaLink.
Deploying Prospera MegaLink on the network assures the smooth operation and
streamlining of ERP and CRM applications, even in peak time situations, by
applying dynamic bandwidth balancing between all active connections.  Once installed, Prospera MegaLink allows
more users to share the congested WAN access links through its traffic
algorithm optimization. In addition, mission critical applications are
fortified and protected from performance degradation, improving their
availability, and response time.

The Prospera platform is based on Microsoft
operating systems such as Windows 2000 or Windows XP running on Intel CPU.

In addition, Prospera MegaLink and Prospera
Expert are software-based and scalable to medium traffic volume, up to 100
MBPS.

CisMate

CisMate is positioned to monitor and optimize
the actions of the Cisco router in the network. Routers are configured to
optimize their own operation to the detriment of the rest of the network, even
increasing and further exacerbating packet flow problems.  Marnetics advocates focusing on integrating
a bottleneck-centered solution that is directly aligned, integrated and
compatible with the functioning of the router. 
This enhanced router would organize the packet flow to minimize the
overall effects of the entire network when dropping packets in times of
congestion.

Network stability depends directly on good
routers. However, routers automatically take destabilizing measures to reduce
rapidly evolving queue-caused latencies: Excess packets are dropped from the
queue in order to alleviate this latency upsurge. Packet dropping is
detrimental to network mission critical applications (MCAs),  the sender resends the lost packet and
decelerates its transmission pace (in order to avoid more packet losses). It
considerably impacts the users perceived performance.  The Snow Ball effect caused by the
self-slow-down mechanism in the TCP protocol creates the feeling that
something is stuck in the system.  
For corporate MCAs, packet dropping is very serious. Poor performance
(e.g. ERP, CRM, etc.) is translated immediately to productivity problems,
financial damages, lost customers, and so on.

The CisMate is a LAN device directly attached
to the WAN router by installing both devices on the same Ethernet switch. Using
DSDQ, CisMate controls the entire LAN-to-WAN transmitted packet queue.  Under normal traffic conditions, the CisMate
remains unobtrusive while the data is forwarded directly to the router.  However, when the router begins congesting,
indicated by increased packets awaiting router service, the DSDQ technology
commences.

DSDQ incorporates several vital proprietary
mechanisms which specifically address strong traffic bursts that saturate the
router. Its main goals include preventing packet-dropping and router-latency
minimization. Under site testing, the packet loss ratio under large volumes of
traffic decreased from a previously high 5% - 20% range to less than 0.5% with
the newly installed CisMate.

The implications of this steep reduction are
considerable. A significant percentage of saturated networks packet dropping is
eliminated and congested routers are protected from severe performance
degradation, maintaining much better service level toward the network users.
Session slow-downs will hover around 5% instead of the previous 80% level
without the CisMate, equal to a speed increase of over 500%.

CisMate protects the WAN routers and the
whole network from severe service level deterioration under strong traffic
stress.  Also, MCAs will endure the
fewest possible problems during networks most difficult moments, like
downtimes, severe slow downs, thus, minimizing damage to the enterprises
productivity.

18

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Prospera
Expert

Prospera Expert enables enterprises, ISPs,
and cellular operators to obtain a detailed overall panoramic picture of their
traffic over Wide Area Network (WAN), to help manage their network resources
effectively. Users receive comprehensive traffic reports both in real time and
in an historical mode by a simple click and view operation in an executive
format. Prospera Expert is specially designed to operate over a large variety
of different networks, independent of physical infrastructure and can be
deployed easily and quickly at central locations on the network.

Prospera Expert is an advanced Network
Information Systems tool. Traditional network management systems focus on
monitoring and troubleshooting. Prospera Expert shifts the center of gravity
to issues such as network economy, service level analysis, congestion analysis
and future capacity planning. It complements the Prospera MegaLink product
that maximizes network infrastructure utilization by increasing the effective
capacity and protection of mission critical applications.

Prospera Expert was created to meet the need
of executives, IT (Information Technology) managers and network
administrators for a high level tool that focuses on performance provided to
the users or subscribers. It also provides a profile of network utilization
through a large variety of predefined reports, as well as customized, user
defined queries, which are accessible through any standard browser by multiple
users. Most important, Prospera Expert provides a new level of network insight
without the need to understand the underlying technologies or protocols.

Prospera Expert software/hardware sales
would be a result from purchases by clients either directly or through
distributors and installed on the network. Staff of the clients IT department
operate the system and use it either with or without the further involvement of
Marnetics staff or local affiliates.

The commercial version of Prospera Expert
(V2.1) is intended to be completed by June 2003.

NetQA

During 2002, Marnetics launched a new service to be offered to its
customers that was the main sales revenue source for the Company in years 2002
and 2003. The service aims the needs of enterprises to better design their
network for capacity and performances optimization. Marnetics uses its
expertise in IP networks combined with its advanced Network Information Systems tool, the Prospera Expert, to
perform a comprehensive network performance analysis. The outcome of the analysis is in-depth
reports and recommendations to the IT managers and network managers how to
better utilize their enterprise network infrastructure and how to plan ahead
their network infrastructure. Marnetics intends to implement the service using
its own resources or, in some other cases, together with its qualified
distributors.

ISP Rating

The ISP Rating concept is the setting up of a
web site through which consumers will be able to compare the performance of the
various ISPs operating in their local market. By providing this unique service,
the site is expected to become an important hub.

ISP Rating is based on the deployment of
Marnetics technologies for the Israeli market. For its first deployment in
Israel, ISP Rating is seen as a marketing tool which can demonstrate the
abilities of the Expert in a public area.

Customers
and Distributors

The Prospera family of products will offer
increased functionality while reducing costs and improving performance and
total Cost of Network Ownership. Prospera family of products may be adapted by
three main market segments: enterprises, Internet related service providers and
cellular carriers. These target audiences will be reached either through direct
contact or, through qualified distributors or, marketing channels, such as
Value-Added Resellers or System Integrators. The Company has focused its
initial marketing efforts in the Middle East, United States, and the Far East.

19

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In early July 2001, Marnetics signed an OEM
agreement with Speedwise Technologies Ltd., a company in which Marnetics Ltd.
owns a 14.73% interest as of December 31, 2002, to enable Marnetics to sell its
products for cellular customers (which are currently in development), whether
integrated into Speedwises products or as stand-alone products, to Speedwises
installed base of approximately 40 cellular companies worldwide and a much
broader network of contacts.  Pursuant
to this agreement, Speedwise was to pay Marnetics 30% of the income generated
by the sale and maintenance of the Marnetics products.  This agreement had a one-year term with
automatic renewal. As of November 1, 2001, the OEM agreement was cancelled
between the parties.

In March 2002, Marnetics signed a
distribution agreement with Magalcom Communications & Computers Ltd. to
become a nonexclusive distributor of Marnetics products in Israel. The
agreement has terminated during June 2003.

In April 2002, Marnetics signed a
distribution agreement with TNN Networks Ltd. to become a nonexclusive
distributor of Marnetics products in Israel. The agreement has terminated
during June 2003.

In October/November 2002, Marnetics installed
its first commercial site with Singapores National Cancer Center (NCC) through
the deployment of the Marnetics Prospera product line, the MegaLink and the
Expert, to improve performance and visibility across the networks for their
oncology department.  NCC operates a
distributed Intranet network, and has benchmarked Marnetics with other, leading
bandwidth management solutions. Marnetics Prospera MegaLink solution was
selected primarily due to its success in fortifying the performance of
mission-critical real-time applications, even when the network is heavily
congested. NCC has also installed the Prospera Expert to conduct ongoing
analysis and reporting on the traffic flow across the network.

During 2002, Marnetics completed tests of its
products and started to sell its products and services mainly in Israel.

During 2003, the Company has ceased marketing
efforts outside of Israel and was concentrating its efforts inside Israel as
well as attempted to find distributors in the United States through the
agreement with RevenueTraction, LLC.

Licensing Arrangements

In April 2001, Marnetics Ltd. entered into a
software license agreement with Speedwise Technologies Ltd., a company in which
Marnetics Ltd. owns a 14.73% interest as of December 31, 2002.  Under this license agreement, Marnetics
granted Speedwise a non-exclusive license to use certain programs and software
products owned by Marnetics which Speedwise is using to develop other software
products.  Marnetics is entitled to
receive a fee based on the sale of this derivative software product of either
(a) US $25 per concurrent user if sold bundled with other Speedwise products,
or (b) 15% of net revenues from the product. 
The agreement has a perpetual term. During October 2002 Speedwise sold
most of its assets and IP. and the Company does not expect significant revenues
from this agreement, if any. See Item 7. B. - Related Party Transactions.

Competition

We compete in a new, rapidly evolving and
highly competitive sector. We expect competition to persist and intensify in
the future from a number of different sources. We compete with products of
Packeteer, Allot, Expand, Peribit, Cisco, Check Point and several small private
companies that sell products that utilize competing technologies to provide
bandwidth management and network monitoring systems. In addition, our products
and technology compete for information technology budgets (CapEx) allocations
with services that offer network analysis offered by IT service providers.
Lastly, we face indirect competition from companies that offer enterprises and
service providers increased bandwidth and infrastructure upgrades that
increase the capacity of their networks, and thereby may lessen or delay the
need for capacity enhancement.

20

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We believe the principal competitive factors
in the capacity enhancement solutions market are:

| |  | expertise and in-depth
  knowledge of IP networks structure, networks traffic and infrastructure
  behavior;
| | - | ------------------------------------------------------------------------------------------------------------
| |  | timeliness of new product
  introductions;                                                                  
| |  | ability to integrate
  easily into the existing network infrastructure;                                     
| |  | ability to ensure end-user
  productivity and mission critical application performance;                     
| |  | compatibility with
  industry standards;                                                                    
| |  | products that decrease
  latency and packet loss;                                                           
| |  | products that demonstrate
  short Return on Investment (ROI);                                               
| |  | size and scope of
  distribution network;                                                                   
| |  | brand name; and                                                                                             
| |  | access to customers and
  size of installed customer base.                                                  

While various such solutions and technologies
exist which address the network management problem, there is, to the best of
our knowledge, no similar product based on a similar technology like that
developed by Marnetics to increase capacity of traffic flow over IP networks.

In the future, competing products may be
developed and marketed by numerous well-established, well-financed companies,
including traffic management vendors, network optimization solutions
developers, cellular application providers and cellular vendors.  In addition, our products presently compete
indirectly with other network capacity enhancement solutions and other queuing
schemes, although we believe that our product line enhances rather than
conflict with these products.

Research
and Development

Our research and
development plan was aimed at leveraging the Marnetics current technology and
developing the Prospera family of product and related products.

Marnetics has sufficient cash to finance the
anticipated costs of development activities of its product line until June
2003.

In May 2002, Marnetics
submitted an application to obtain research and development grant in the sum of
$230,000 from the Office of the Chief Scientist, of the Ministry of Industry
and Trade, of the State of Israel (OCS) which was approved in November 2002.
To date Marnetics has received a grant of $185,000.  The grant is based on research and development expenses that
Marnetics had actually expensed until May 2003. There can be no certainty that
the remaining funding will be received by Marnetics.

As mentioned earlier,
Prospera MegaLinkwas
originally Marnetics intended flag ship product. However, market feedback,
especially the difficulties in selling software to operate on an existing
network, has resulted in a shift in strategy towards:

| | a) | Developing
  the NetQA methodology, including the development of the Prospera Expert Pro,
  both supporting the overall revenue generating objectives. 
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                        
| | b) | Migration
  of the Prospera software to positioning as an appliance (hardware) with the CisMate to be clearly positioned to boost
  router performance.
| |    |                                                                                                                                                        
| | c) | The
  development of the ADSL FreeFlow which provides capacity enhancement
  functionality to ADSL connected businesses.                               

As a result, Marnetics
intends to position its products as both actively and passively protecting the
network, rather than simply improving its performance.

The commercial version
of Prospera Expert (V2.1) is intended to be completed in June 2003.

Prototype of CisMate
has been introduced allowing a relatively fast release of the product during Q1
of 2003.

21

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During April/May 2003,
the Marnetics laid off the research and development employees including the VP
R&D, Mr. Newman who will be leaving the Company and Marnetics in June 2003
and will possibly be available for consultation dependent on negotiations
between the Company and him. The Company plans to further reduce its R&D
staff during the Q3 2003. Such actions will have an adverse effect on the
business and operations of Company and Marnetics.

Trade Show

Marnetics exhibited at CommunicAsia 2002,
Asias premier international information and communications technology forum
that took place June 17-21, 2002 in Singapore, its Prospera line of products.
The Company chose to introduce its products at CommunicAsia 2002 because it is
the largest INFOCOMM show in Asia.  By
exhibiting alongside other international technology leaders who showcase their
products to business professionals looking for the latest IT products and
services, the Company makes potential distributors aware of its products.

Current Strategy  Mergers
and Acquisitions, and Selling of Marnetics Technology

As part of its survival strategy, the Company
seeks to merge with other businesses and/or sell Marnetics technology. The Company
has exploratory discussions with hi-tech companies, but has not entered into
any definitive agreements.  Discussions
with one of our previous distributors are at an advanced  stage, but there can be no assurance,
however, that the Company will be able to reach agreement on satisfactory
terms.

Marnetics
needs additional cash resources to
(i) accelerate the pace of product development and bring forward the dates of
product launch, (ii) increase investment in marketing and business development
activities, including the appointment of distributors, progress with strategic
partners and general corporate promotion such as appearance at exhibitions and
conferences, and (iii) consider M&A activities, leveraging the fact that it
is a traded public company with tax shelter.

Further, Marnetics is limited when planning
the possible sale of its technology, based on the terms established in the
agreement with the Office of the Chief Scientist of Israel and under applicable
law, on the condition that Marnetics may not sell its intellectual property to
a non-Israeli entity.

Marketing,
Promotional, and Consultants

In January 2002, Marnetics entered into
promotional agreement with Karif Communications Ltd. to provide to Marnetics
public relations services, subject to extension during June, 2002. The
agreement finished May 2003.

In February 2002, Marnetics entered into a
services agreement with Expenion LLC, to provide to Marnetics, primarily in the
United States but not limited to such, on a non-exclusive basis, business
development services for the sale of its products.

In February 2002, the Company entered into a
non-exclusive finders agreement with Gentech Holdings SA and Opus Holdings SA
to assist in raising equity investment during year 2002 for fees and
securities.

In March 2002, Marnetics entered into a
services agreement with Levi Zelkind, to provide to Marnetics in the
Territories of Russia, Kazakhstan, Poland, Yugoslavia, Slovenia, Czech
Republic, and Greece, on a non-exclusive basis, business development services
for the sale of its products. The agreement has come to an end.

In March 2002, Marnetics signed a
distribution agreement with Magalcom Communications & Computers Ltd. to
become a nonexclusive distributor of Marnetics products in Israel. In April
2002, Marnetics signed a distribution agreement with TNN Networks Ltd. to
become a nonexclusive distributor of Marnetics products in Israel. The Company
terminated these agreements in June 2003 and as such the Company and remains
without any local distributors in the Israeli market.

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In April 2002, Marnetics entered into a
services agreement with Menachem Sharron to provide to Marnetics in the
Territory of Southern Africa, on a non-exclusive basis, business development
services for the sale of its products.

In June 2002, the Company entered into a
letter of intent with PortfolioPR, a New York based company, for public
relation and investor relations services. The Agreement came to an end in
August 2002.

On December 15, 2002, the Company entered
into a non-exclusive services agreement with RevenueTraction, LLC to identify
potential distributors, business opportunities, investment prospects and other
financing for the Company and/or any affiliates of the Company. The Agreement
came to an end in May 2003.

On December 16, 2002, the Company entered
into a non-exclusive services agreement with Yitzhak Rosenbaum, to engage in
services to assist the Company in approaching prospects for the purpose of
obtaining funding for the Company or its affiliates by means of investment,
merger, acquisition or sale of asset transactions, as well as for the
establishment of business relationships for the marketing of the Companys
products.

On February 3, 2003, Marnetics announced the
launch of an ISP rating site that utilizes the advanced technology provided by
the ProsperaTM Expert. The site tests five major Israeli ADSL ISPs
service levels based on five parameters that best describe the overall service
and its relative importance to the ADSL users. The site operates automatically,
providing information five times daily to the users (current and potential ADSL
users).  The information is then
accumulated and presented on a weekly and monthly basis along with colorful
graphics. Marnetics believes its the first of the kind in the ADSL market.

Distribution
Network

Potential
for Marnetics products exist throughout the world, wherever IP networks are in
operation. However, the process to research the local market, select and
appoint suitable distributors and provide the necessary technical support is
relatively expensive. Consequently, Marnetics is focusing on selected major
markets which likely justify that investment.

Prospera products were marketed via two
parallel routes:

| |  | Direct  directly between
  Marnetics and customers.                 
| | - | ---------------------------------------------------------------------
| |  | Indirect  through a
  geographically spread network of distributors.

In the local market, the initial focus was to
build a customer base (primarily larger enterprises). Successful take up by
these customers should act as reference sites, generating interest from other
potential direct customers and potential distributors.

Distributors will supply products and offer
services (installation, maintenance and Net QA). Their staff will receive full
training, so that they will be able to provide the same quality of service as
provided by Marnetics itself.

The preferred profile of distributors is
systems integrators with existing customer base, providing network maintenance
services.

CisMate will be distributed by suppliers of network
hardware, especially those companies covering LAN products.

In the first quarter of 2003, Marnetics had
carried out a highly active public relations activity aimed at raising and
maintaining interest in the Company from the investor community and firmly
placing Marnetics on the industry radar screen in terms of attracting interest
from potential customers and business partners. So far, the response has been
limited which can have a possible adverse effect on the Company.

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Events that took place during the first half of year 2003 were:

|First Half | - OCS Grant                                                                                                            
|---------- | -----------------------------------------------------------------------------------------------------------------------
|2003       | - Appointment of a chief
  technical manager                                                                           
|           | - Revenue Traction
  Agreement                                                                                         
|           | - Launching of the ISP
  Rating website.                                                                               
|           | - Customer installations 
  Orbotech, NCC Singapore, Kibbutz Erez, Magan David Adom, Negev Ceramics,
  Iscor and more.
|           | - Handling of Legal Issues                                                                                             

Strategic
Partnerships

Following decisions reached at the AGM in
November 2002, the Company has resolved to pursue alliances and partnerships
with leading companies in the Network arena.

The Marnetics technologies have been
developed with the ability to easily integrate and operate alongside other
network products. As a result, there are opportunities to establish OEM
agreements with developers/suppliers of network products or to sell/license
technologies to leading industry players.

The opportunity of strategic cooperation has
an important effect on product definition and design. As product rollout
continued during Q1 and Q2 of 2003, the efforts to increase market
knowledge/feedback and approach potential partners was intensified especially
with the assistance of RevenueTraction, LLC. This agreement has been terminated
on the response has been has been limited which can have a possible adverse
effect on the Company.

ELECTRICAL BUSINESS

Prior to December 2000,
the Companys sole business was as an electrical and lighting contracting and
engineering firm engaged in the installation and maintenance of infrastructure
works located in the State of Israel. 
The Electrical Business has been characterized by intense competition
and pricing pressures over the past several years.  The results of operation of the Electrical Business have also
been materially adversely affected by the economic slowdown and political
instability in Israel.  As a result and in order to enable the
Company to focus on the Network Business, the Company sold the Electrical
Business, effective as of March 31, 2001. 
See Item 8B  Significant
Changes.

C.      Organizational
Structure

The following is a list of the Companys
direct and indirect significant subsidiaries as of May, 2003:

|Name of 
  Significant 
  Subsidiary/Affiliate                        |  | Country
  of Incorporation |  | Percentage
  of Ownership 
  Interest and Voting(1)
|--------------------------------------------------------------------- |  | -------------------------- |  | ---------------------------------------------------
|                                                                      |  |                            |  |                                                    
|Marnetics,
  Ltd.                                                     |  | Israel                     |  | 100%(3)                                            
|                                                                      |  |                            |  |                                                    
|Marnetics,
  Inc. (a subsidiaryof Marnetics Ltd.)
  (not active)      |  | Delaware,
  USA            |  | 100%                                               
|                                                                      |  |                            |  |                                                    
|Speedwise
  Technologies Ltd.
  (an affiliate of Marnetics
  Ltd.)(2) |  | Israel                     |  | 17.1%
  14.73% fully diluted basis                 

|(1) | On fully diluted basis.                                                                                                                                                                                                                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                 
|(2) | The Company holds 450,000
  Ordinary Shares of Speedwise Technologies Ltd (Speedwise). Speedwise
  entered into an agreement to sell all its assets and intellectual property to
  Orsus Solutions Ltd., an Israeli technology company. See Item 7. B. Related Party Transactions.                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                 
|(3) | On December 11, 2002 the
  Board of Directors resolved to authorize management of Marnetics  to structure an Employment Stock Option
  Plan for the year 2003 and to allocate to employees of Marnetics up to 5
  (five) per cent of the issued and outstanding share capital of Marnetics on a
  fully diluted basis. The program has not yet gone into effect.

24

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D.          Property,
Plants and Equipment

As of December 20, 2000, we relocated our
headquarters  from Moshav Batzra to a
facility in Raanana, Israel, leased by the subsidiary - Marnetics Ltd. The
facility consists of approximately 232 square meters. The lease expired on May
30, 2003 and was renewed until December 2003. The rent expense for the facility
is currently approximately US $2,088 per month, plus Israeli value added
tax.

As part of sale of the Companys electrical
operations as described in Item 8B  Significant Changes, all rights and
obligations of the Company regarding the facility in Batzra were assigned to
the purchaser of the Companys Electrical Business, Idan Millennium Investments
and Assets Ltd., as of March 31, 2001.

Item
5.             Operations
and Financial Review and Prospects

The following contains
forward-looking statements, which involve risks and uncertainties.  Actual events or results may differ
materially from those discussed in forward-looking statements as a result of
various factors.  The following discussion and analysis of
financial condition and results of operations should be read along with the
accompanying Consolidated Financial Statements for the year ended December 31,
2001. See Item 8A
Financial Information. These reports are presented in United
States dollars and have been prepared in accordance with US GAAP.

A.          Operating
Results

Overview

Marnetics Broadband Technologies Ltd.
(formerly Stav Electrical Systems (1994) Ltd.) (the Company or Stav) was
engaged in the manufacture, installation and maintenance of electrical and
lighting systems, mainly for public institutions and in the development of
Internet performance enhancement solutions through its wholly owned subsidiary
Marnetics Ltd.

The Companys operations during 2002
consisted of the core business of developing and marketing network capacity
enhancement and network information analysis solutions for IP networks or the
Network Business, which is handled through our wholly-owned subsidiary,
Marnetics Ltd. During 2002 the Company also dealt with legal issues and
collection of debt relating to the Electrical
Business, which was sold during 2001. See Item 8B  Significant Changes.

On June 1, 2000, a share exchange agreement
was signed between the Company and Marnetics Ltd. The agreement was consummated
after final approval of the Companys shareholders on December 31, 2000. The
fair value of Stav shares, US$ 11,314,280 was determined on the basis of the
average market price of its outstanding shares US$ 8.00. Goodwill in the
amount of $11,309,000 was recorded accordingly.

The merger between Marnetics and the Company
was accounted for as a reverse merger. As the shareholders of Marnetics (as a
group) received the largest ownership interest in the Company, Marnetics was
determined to be the accounting acquirer in the reverse acquisition. As a
result, the historical financial statements of the Company (prior to December
31, 2000) were replaced with the historical financial statements of Marnetics.
The statements of operations for 2000 and 1999 include the operations of
Marnetics. The December 31, 2000 balance sheet includes the accounts of the
Company and Marnetics. The fair value of Stav shares, US$ 11,314,280 was
determined on the basis of the average market price of its outstanding shares US$ 8.00
per share. Goodwill in the amount of $11,309,000 was recorded accordingly.

25

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Effective March 2001, sold off the electrical
business and wrote-off goodwill in the amount of $2 million as discontinued
business. Further, during 2001, in view of the markets downturn, the Company
assessed the value and future benefit of its enterprise level goodwill pursuant
to Accounting Principles Board Opinion No. 17, Intangible Assets (APB 17).
The result of the assessment was a full write-off of the goodwill in the amount
of $9,309,000

Marnetics has a limited operating history and
is subject to risks, expenses and uncertainties frequently encountered by
companies in the new and rapidly evolving markets for network capacity
enhancement products and services. There is no assurance, however, that
additional capital will be available to the Company and the inability to obtain
such financing would have a material adverse effect on the Company. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty and these adjustments may be
material.

During 2000, Marnetics raised US$ 7.04
million from new investors and recruited additional employees. During 2001,
Marnetics continued to increase its research and development activities and
shifted its core business from developing and marketing Internet performance
enhancement solutions to the development and marketing of IP network, capacity and
analysis solutions.

The Company has a limited operating history
and has sustained losses since its inception. 
As shown in the accompanying financial statements, the Company incurred
a net loss of $3,021,000 for the year ended December 31, 2002 and as of that
date has accumulated a loss of $24,333,000. Management is actively seeking
additional funds or M&A transactions that will provide funds needed to
support its operation in order to fully implement its business plans. Failure
to find the appropriate funds or M&A will force the Company to close down
in the third quarter of year 2003.

In May 2002, Marnetics
submitted an application to obtain research and development grant in the sum of
$230,000 from the Office of the Chief Scientist, of the Ministry of Industry
and Trade, of the State of Israel (OCS) which was approved in November 2002.
To date Marnetics has received a grant of $185,000.  The grant is based on research and development expenses that Marnetics
had actually expensed until May 2003. There can be no certainty that the
remaining funding will be received by Marnetics.

As of April 26, 2003,
the Company decided to lay off the majority of the employees of the Company and
its wholly-owned subsidiary, Marnetics Ltd. in the areas of marketing, sales
and research and development. The remaining employees are in the area of
administration and will be left until the end of year 2003. A new updated
budget was approved that reflects the reduction of the research and
development, and marketing and sales operations of the Company and Marnetics
Ltd.

Effective
March 2001 the Company sold to Idan Millenium Investments and Assets Ltd.
(IDAN), a company under the control of Dov Strikovsky, a major shareholder and President, Chairman
and former CEO of the Company, all the fixed assets, inventories, other assets and liabilities and
related goodwill, in the amount of an an appraised value of $2,000,000,
relating to the electrical operations, for a consideration of $597,000. The
consideration is payable in 25 monthly installments of $24,000 commencing
February 1, 2002. In May 2002 the Company signed an addendum with IDAN to
change the terms of payments to such that the first 11 installment will be
reduced to $7,000 each and the remaining 14 installments will be of $37,000.
The Company, considering the collectibility probability, decided to establish
an allowance on the amount not yet collected. During 2002 $71,000 were repaid
on the account of the sale consideration. See Item 7B  Related Party Transactions.

In
prior years the Company granted loans to Mr. Strikovsky in the amount of
$1,228,000. The loan was linked to the Israeli CPI and bore interest of 2% per
annum and was repayable in eight annual installments each comprised of 1/8 of
the principal and the accrued interest thereon commencing December 2000. At
December 31, 2001 the Company reassessed the collectibility of the loan in
accordance with provisions of SFAS No. 114 Accounting by Creditors for
Impairment of a Loan, and resolved, considering the probability of its
collectibility, to establish a loan loss allowance for the entire amount.
Income from impaired loan will be recorded using the cash method. During 2002
$142,000 were repaid on the account of the loan.

To
secure his obligations under the various agreements Mr. Strikovsky has
collateralized 300,000 shares that he owns of the Company. No other payments were
made by Mr. Strikovsky subsequent to December 31, 2002. The Company is involved
in ongoing legal efforts aimed at collecting amounts due from Mr. Strikovskyand
the companies under his control. . See Item 7.B.  Related Party Transactions  Indemnification by
Significant Shareholder.

26

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On May 9, 2001 an agreement (the Bank Agreement) was signed between
the Company and Bank Hapoalim, Ltd. (the Bank) with respect to the Companys
debt to the Bank in the amount of $3,127,000 (the Debt). In accordance with
the Bank Agreement, the Bank has agreed to release the Company from its
obligation to repay the Debt and to cancel the floating charge and liens
registered in favor of the Bank on properties of the Company provided that, by
May 31, 2001 the Company shall pay $954,000 to the Bank on account of the Debt
(the Repaid Amount) and in addition the Company shall have assigned to the
Bank all its rights with respect to the debt of the municipality of Hod
Hasharon to the Company in the amount of 
$2,173,000. The Company paid the $954,000 and made the assignment in the
aforesaid amount.

In addition, the Company has provided the Bank with a guarantee
of up to $716,000, which decreases in the ratio of NIS 1:2 paid on account of
the outstanding debt of Hod Hasharon, which has been assigned to the Bank (Note
3b). To date Hod-Hasharon has not made any re-payment on account of the debt,
and therefore the guarantee has not decreased. According to the terms of the Bank
Agreement, following November 30, 2002, the Bank is entitled to exercise the
outstanding amount of the guarantee, and since the guarantee has not decreased,
the Company decided to establish an allowance for the guarantee in full. Nevertheless, the Company and
its representatives are conducting on-going negotiations with Hod-Hasharon for the repayment of the debt to the
Bank, although at present the Company cannot assess what portion of the debt
will be recovered, if any, (and the guarantee decreased accordingly) as a
result of such negotiations, or any future action by the Company. See Item 8A - Legal Proceedings.

Failure
to collect the total amounts, or part of it, from Idan Millenium Investments
and Assets Ltd, Mr. Dov Strikovsky and the municipality of
Hod Hasharon could have a negative impact on the company future cash
flow and liquidity.

The loss from operation of the discontinued
activities in the Electrical Business was $450,000. The loss on the sale of the
Electrical Business was $2,278,000.

Until September 2000 the Company held 33.6%
of the outstanding shares of Speedwise Technologies Ltd (Speedwise). In
September 2000, Speedwise issued shares to a third party which resulted in a
decrease in the Companys holdings in Speedwise to 19.19% and during February
2001 additional shares were issued to Orsus Solutions Ltd., (Orsus) an
Israeli technology company resulting in a further dilution to 14.73%. In October
2002 Speedwise sold its assets and intellectual property to a third party in
consideration of cash and shares. Based on the consideration received by
Speedwise, the Company assesses that the recoverable amount of its investment
in Speedwise will be $60,000 and as a result the Company recorded as of
December 31, 2002 a write down of $522,000 of investment.

YEAR ENDED DECEMBER 31, 2002 COMPARED TO
YEAR ENDED DECEMBER 31, 2001UPDATE

Operating Revenues

Company had no sales in year ending
December 31, 2001. Commercialization of the products started in third
quarter of 2002. The Company had $19,000 sales in the year ending December 31,
2002, $9,000 from the Speedwise OEM Agreement, and $6,000 from selling Prospera
products, and $4,000 from consulting services.

Operating Expenses

Research and Development expenses consisted
primarily of salaries and related expenses. Research and Development expenses
decreased from $812,000 in the year ending December 31, 2001 to $486,000
in the year ending December 31, 2002.  The decrease was primarily due to Companys reduction of its
research and development activities and the accrued of a grant from the OCS in
the sum of $140,000.

Selling and Marketing expenses consisted
mostly of salaries and increased from $310,000 at the end of December 31, 2001
to $464,000 at the end of December 31, 2002, due to initialization of business
development efforts. Travel and promotional expenses increased as products were
ready for sale.

27

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General and Administrative expenses consisted
primarily of salaries and related expenses for administrative and executive
staff, fees for professional services, and general office and rent expenses.
General and Administrative expenses decreased from $1,128,000 in the year
ending December 31, 2001, to $784,000 in the year ending
December 31, 2002. The decrease was primarily due to the reduction of
employees and decreased professional and consulting fees.

The
Company and Mr. Strikovsky were named as a defendant in a claim for specific
performance of an agreement entered into by the Company and the plaintiff, Ananda Capital Partners, Inc., in April 1999 (the
Agreement) as well as damages as a result of a breach of the agreement. On
July 2, 2001, due to the fact that no defense and/or reply were provided by the
Company, judgment was entered against the Company in the amount of $725,000. On
February 7, 2002 the Company filed a motion to vacate the judgment and on
February 27, 2002 the court rejected the motion. The Company filed an appeal on
the court decision which was accepted by the Supreme Court of the state New
York with instructions to allow evidentiary hearing that is now in process. The
plaintiff proposed to settle the suit for $250,000 but the Company rejected the
proposal. In 2001 the Company has established an allowance in the amount of
$750,000 to provide for its possible exposure. Based on the new developments
the Company decreased the allowance by $500,000 to $250,000 which is its
current estimate of the probable exposure.See
Item 8A (1)  Financial
Information -Legal Proceedings.

On June 1, 2000, a share exchange agreement
was signed between the Company and Marnetics Ltd. The fair value of Stav
shares, US$ 11,314,280 was determined on the basis of the average market price
of its outstanding shares at US$ 8.00 per share. Goodwill in the amount of
$11,309,000 was recorded accordingly. Effective March 2001, sold off the
electrical business and wrote-off goodwill in the amount of $2 million as
discontinued business. Further, during 2001, in view of the markets downstream,
the Company assessed the value and future benefit of its enterprise level
goodwill pursuant to Accounting Principles Board Opinion No. 17, Intangible
Assets (APB 17). See Item
18 Financial Statements - Note 1 & 3b. The result of the
assessment was a full write-off of the goodwill in the amount of $9,309,000.

On December 31, 2001 the Company reassessed
the collectibility of the loan given to Mr. Dov Strikovsky and his affiliated
companies, a major shareholder and President, Chairman and former CEO of the
Company, in the amount of $1,228,000 in accordance with provisions of SFAS No.
114 Accounting by Creditors for Impairment of a Loan, and resolved,
considering the probability of its collectibility, to establish a loan loss
allowance for the entire amount. Income from impaired loan will be recorded
using the cash method. During 2002, $266,000 were repaid to the Company. See Item 7B - Related Party Transactions
-Loans to Significant
Shareholder and Former Director and CEO.

During the year ending
December 31, 2002, the Company recorded a write down of $522,000
based on the estimated recoverable amount of $60,000 of its holdings in
Speedwise Technologies Ltd. from the sale of Speedwises assets and
intellectual property in consideration of cash and shares.

The
Company has provided the Bank with a guarantee of up to $716,000, which
decreases in the ratio of NIS 1:2 paid on account of the outstanding debt of
Hod Hasharon, which has been assigned to the Bank (Note 3b). To date
Hod-Hasharon has not made any re-payment on account of the debt, and therefore
the guarantee has not decreased. According to the terms of the Bank Agreement,
following November 30, 2002, the Bank is entitled to exercise the outstanding
amount of the guarantee, and since the guarantee has not decreased, the Company
decided to establish an allowance for the guarantee in full.

Non-cash compensation expenses totaled
$805,000 in the year ending December 31, 2001 compared to $792,000 in the year
ending December 31, 2002.

Non-cash compensation includes the
amortization of unearned employee stock-based compensation and expenses for
options granted to a related party. 
Stock-based compensation expenses are amortized over the vesting
schedule of the option, typically four years, using the straight-line approach.

Financial Income

Net financial income for the year ending
December 31, 2001 and the year ending December 31, 2002 was
$175,000 and $32,000, respectively. These items consist of interest earned on
bank deposits and gains and losses from a re-measurement of monetary balance
sheet items resulting from transactions in non-dollar currencies.

28

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Share in losses of
Affiliate

Until September 2000 the Company held 33.6%
of the outstanding shares of Speedwise Technologies Ltd (Speedwise). In
September 2000, Speedwise issued shares to a third party which resulted in a
decrease in the Companys holdings in Speedwise to 19.19%. During February 2001
additional shares were issued to third parties resulting in a further dilution
to 14.73%. During the year ending December 31, 2000 the Company followed the
equity method and shared in the losses of the affiliate in the amount of
$639,000. Effective January 1, 2001, the investment was carried at cost, and
therefore, the Company does not share in any losses of the affiliate in the
years thereafter. In October 2002 Speedwise sold its assets and intellectual
property to a third party as stated above under Operating Expenses. Based on
the consideration received by Speedwise, the Company assesses that the
recoverable amount of its investment in Speedwise will be $60,000 and as a
result an impairment charge of $522,000 has been recorded.

Tax

During the year 2002 the Company and
Marnetics reached an agreement with the tax authorities regarding tax liability
for the years 1998 to 2001. The Company made a provision for this liability and
for the year 2002. Marnetics Ltd. has not been assessed for income tax purposes
since incorporation.

Discontinued Operations

On June 10, 2001, the Company
executed an agreement, effective March 31, 2001, to sell, its Electrical
Business, including certain related liabilities, to Idan Millenium Investments
and Assets Ltd, wholly-owned by the Companys President, Chairman and former
Chief Executive Officer and current major stockholder, Dov Strikovsky. The
company recorded a loss on the sale in the sum of $2,278,000. The company
recorded the loss from the Electrical Business for the first quarter of 2001 as
a discontinued operation resulting in a loss of $450,000.

Net Loss

Net loss in the year ending
December 31, 2001 and the year ending December 31, 2002 was
$16,895,000 and $3,021,000, respectively.
Net loss per share was $(2.51) and $(0.41) respectively.

YEAR ENDED DECEMBER 31, 2001 COMPARED TO
YEAR ENDED DECEMBER 31, 2000

Operating Revenues

The Company had no sales in either the years
ending December 31, 2000 or December 31, 2001. Commercialization
of the products started in second quarter of 2002.

Operating Expenses

Research and Development expenses consisted
primarily of salaries and related expenses. Research and Development expenses increased
from $252,000 in the year ending December 31, 2000 to $812,000 in the year
ending December 31, 2001.  The
increase was primarily due to Companys expansion of its research and
development activities.

Selling and Marketing expenses consisted
mostly of salaries and rose from $142,000 at the end of December 31, 2000 to
$310,000 at the end of December 31, 2001, due to initialization of business
development efforts.

General and Administrative expenses consisted
primarily of salaries and related expenses for administrative and executive
staff, fees for professional services, and general office and rent expenses.
General and Administrative expenses increased from $722,000 in the year ending
December 31, 2000, to $1,128,000 in the year ending
December 31, 2001. The increase was primarily due to the recruiting
and hiring of additional employees and due to increased professional and
consulting fees.

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The Company and Mr. Strikovsky was named as a
defendant in a claim for specific performance of an agreement allegedly entered
into by the Company and the plaintiff, Ananda Capital Partners, Inc., in April
1999 (the Agreement) as well as damages as a result of a breach of the agreement.
On July 2, 2001, due to the fact that no defense and/or reply were provided by
the Company, judgment was entered against the Company in the amount of
$725,000. On February 7, 2002 the Company filed a motion to vacate the judgment
and on February 27, 2002 the court rejected the motion. The Company filed an
appeal on the court decision which was accepted by the Supreme Court of the
state New York with instructions to allow evidentiary hearing that is now in
process. The plaintiff proposed to settle the suit for $250,000 but the Company
rejected the proposal. In 2001 the Company has established an allowance in the
amount of $750,000 to provide for its possible exposure. See Item 8A (1)  Financial Information
-Legal Proceedings.

On June 1, 2000, a share exchange agreement
was signed between the Company and Marnetics Ltd. The fair value of Stav
shares, US$ 11,314,280 was determined on the basis of the average market price
of its outstanding shares at US$ 8.00 per share. Goodwill in the amount of
$11,309,000 was recorded accordingly. Effective March 2001, sold off the
electrical business and wrote-off goodwill in the amount of $2 million as
discontinued business. Further, during 2001, in view of the markets downstream,
the Company assessed the value and future benefit of its enterprise level
goodwill pursuant to Accounting Principles Board Opinion No. 17, Intangible
Assets (APB 17). See Item
18 Financial Statements - Note 1 & 3b. The result of the
assessment was a full write-off of the goodwill in the amount of $9,309,000.

On December 31, 2001 the Company reassessed
the collectibility of the loan given to Mr. Dov Strikovsky, a major shareholder
and President, Chairman and former CEO of the Company, in the amount of
$1,228,000 in accordance with provisions of SFAS No. 114 Accounting by
Creditors for Impairment of a Loan, and resolved, considering the probability
of its collectibility, to establish a loan loss allowance for the entire
amount. Income from impaired loan will be recorded using the cash method. See Item 7B - Related Party Transactions
-Loans to Significant
Shareholder and Former Director and President, Chairman and CEO. During year 2002 the
Company managed to collect $266,000 plus interest from Mr. Strikovsky.

Non-cash Compensation includes the
amortization of unearned employee stock-based compensation and expenses for
options granted to a related party. 
Stock-based compensation expenses are amortized over the vesting
schedule of the option, typically four years, using the straight-line approach.

During the year ending
December 31, 2001, Company recorded an aggregated unearned
stock-based compensation of $60,000. Stock-based compensation included in
operating expenses totaled $805,000 in the year ending December 31, 2001
compared to $2,408,000 in the year ending December 31, 2000.

Financial Income

Net financial income in the year ending
December 31, 2000 and the year ending December 31, 2001 was
$167,000 and $175,000, respectively. These items consist of interest earned on
bank deposits and gains and losses from a re-measurement of monetary balance
sheet items resulting from transactions in non-dollar currencies.

Share in losses of
Affiliate

Until September 2000 the Company held 33.6%
of the outstanding shares of Speedwise Technologies Ltd (Speedwise). In
September 2000, Speedwise issued shares to a third party which resulted in a
decrease in the Companys holdings in Speedwise to 19.19% and during February
2001 additional shares were issued to third parties resulting in a further
dilution to 14.73%. During the year ending December 31, 2000 the Company
followed the equity method and shared in the losses of the affiliate in the
amount of $639,000. Effective January 1, 2001, the investment is carried at
cost, and therefore, the Company does not share in any losses of the affiliate
in the year ending December 31, 2001.

30

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Discontinued Operations

On June 10, 2001, the Company
executed an agreement, effective March 31, 2001, to sell, its Electrical
Business, including certain related liabilities, to Idan Millenium Investments
and Assets Ltd, wholly-owned by the Companys President, Chairman and former
Chief Executive Officer and current major stockholder, Dov Strikovsky. The
company recorded a loss on the sale in the sum of $2,278,000. The company recorded
the loss from the Electrical Business for the first quarter of 2001 as a
discontinued operation resulting in a loss of $450,000.

Net Loss

Net loss in the year ending
December 31, 2000 and the year ending December 31, 2001 was
$3,996,000 and $16,895,000, respectively.

B.         Liquidity
and Capital Resources

To date, the Company has funded its
operations through equity investments and bank credit lines. During the year
2000 Marnetics issued shares in consideration of $7,297,000. On
December 31, 2002, the Company had $957,000 of cash and cash equivalents
compared to $2,418,000 at December 31, 2001. The decrease is mostly due to cash
used to finance the operation activities in the amount of $1,391,000.  As of December 31, 2001, the Company had no
bank credit lines and is financing its activity based only on cash available.

The Companys capital requirements have been
reduced. Still, cash requirements could exceed cash flow from limited
operations. As a result, the Company may become dependent on bank credit lines
and sales of its securities to fund its development and activities.

The Company reduced during 2003 its operating
expenses in order to reserve enough cash for the anticipated expenses and legal
issues.

Net cash used in operating activities in
2,000, 2001, and 2002 was $872,000, $4,120,000, and $1,391,000,
respectively.  Since the Company has not
generated meaningful revenues to date, it must use its working capital to fund
its research and development, marketing, sales general and administrative
expenses.

The Company had as of December 31, 2002 a
working capital of $3,000, compared to a working capital of $1,652,000 as of
December 31, 2001.

The Companys cash and cash equivalents are
generally held in short term US dollar bank deposits.

Total shareholder equity on December 31, 2002
was $208,000 compared to $2,437,000 on December 31, 2001.

On May 9, 2001 an
agreement (the Bank Agreement) was signed between the Company and Bank
Hapoalim, Ltd. (the Bank) with respect to the Companys debt to the Bank in
the amount of $3,127,000 (the Debt). In accordance with the Bank Agreement,
the Bank has agreed to release the Company from its obligation to repay the
Debt and to cancel the floating charge and liens registered in favor of the
Bank on properties of the Company provided that, by May 31, 2001 the Company
shall pay $954,000 to the Bank on account of the Debt (the Repaid Amount) and
in addition the Company shall have assigned to the Bank all its rights with
respect to the debt of the municipality of Hod Hasharon to the Company in the
amount of  $2,173,000. The Company paid
the $954,000 and made the assignment in the aforesaid amount.

In addition, the Company has provided the Bank with a guarantee
of up to $716,000, which decreases in the ratio of NIS 1:2 paid on account of
the outstanding debt of Hod Hasharon, which has been assigned to the Bank (Note
3b). To date Hod-Hasharon has not made any re-payment on account of the debt,
and therefore the guarantee has not decreased. According to the terms of the
Bank Agreement, following November 30, 2002, the Bank is entitled to exercise
the outstanding amount of the guarantee, and since the guarantee has not
decreased, the Company decided to establish an allowance for the guarantee in
full. Nevertheless, the Company and
its representatives are conducting on-going negotiations with Hod-Hasharon for the repayment of the debt to the
Bank, although at present the Company cannot assess what portion of the debt
will be recovered, if any, (and the guarantee decreased accordingly) as a
result of such negotiations, or any future action by the Company. See Item 8A - Legal Proceedings.

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Failure
to collect the total amounts, or part of it, from Idan Millenium Investments and Assets Ltd., from Mr. Dov Strikovsky
or from the municipality of Hod Hasharon, or losing the litigation or a monetary
settlement with Ananda Capital Partners could have a severe negative impact on the company
future cash flow and liquidity. See Item 3D  Risk Factors -Risks Relating to Collection of Debt
by the Company and Risk Factors  Risks Related to Legal Proceedings.

C.         Research
and Development

Research and Development expenses increased
from $252,000 in the year ending December 31, 2000 to $812,000 in the year
ending December 31, 2001, then decreased to $486,000 in the year
ending December 31, 2002.  The decrease
was primarily due to Marnetics reduction of its research and development
activities, reducing staff and hiring additional staff with lower salaries,
receiving the OCS grant, and purchase of equipment and software. As of June
2003, the Vice President of R&D, Nr. Hanoch Newman, will no longer be an
employee of Marnetics, and possibly be available for consultation dependent on
current negotiations the Company is having with him. Present research and
development efforts are currently reduced.

The main targets of the research and
development department for the year 2002 were to commercialize new versions of
the ProsperaTMproduct line.

In May 2002, Marnetics Ltd. submitted to the
OCS a request to obtain research and development funding in the sum of $250,000
from the Office of the Chief Scientist, of the Ministry of Industry and Trade,
of the State of Israel (OCS) for development of products for the Prospera
platform which was approved on November 2002. The total amount of grants accrued and received at December 31, 2002
was $ 140,000. Marnetics continued to receive grant funding through the
first half of year 2003 as well.

Marnetics is committed
to pay royalties to the Office of the Chief Scientist of the Government of
Israel on proceeds from sales of products in which the Chief Scientist has
participated by way of grants, up to the amount of 100% of the grants received,
in dollar terms plus interest at LIBOR. The royalties are payable at a rate of
3% for the first three years of product sales and 3.5% thereafter. No royalty
expenses were paid to the Chief Scientist in 2002. The research and development
grants are presented in the statements of operations as an offset to research
and development costs. The refund of the grant is contingent on future sales
and Marnetics has no obligation to refund these grants, if sufficient sales are
not generated. Based on the terms established in the agreement with the OCS the
Company may not sell its IP to a non-Israeli entity.

D.Trend Information

The market for network capacity enhancement
solutions is in an early stage of development and its success is not
guaranteed. Therefore, we cannot accurately assess the size of the market, the
products needed to address the market, the optimal distribution strategy, or
the competitive environment that will develop. In order for this area to be
successful, potential customers must invest in traffic management of their
networks and improving the performance of mission critical applications. The
growth of the network capacity enhancement solutions market also depends upon a
number of factors, including the availability of inexpensive bandwidth,
especially in international markets, and the growth in complexity of WAN and
the CapEx of enterprises.

Recently Issued Accounting
Standards

In April 2002, the FASB issued SFAS No. 145,
Rescission of FASB Statements SFAS Nos. 4, 44, and 64, Amendment of FASB
Statement No. 13 and Technical Corrections. SFAS No. 145 will impact how
companies account for sale-leaseback transactions and how gains or losses on
debt extinguishments are presented in financial statements. SFAS No. 145 is
effective for fiscal years beginning after May 15, 2002, early application is
encouraged. Under the provisions of SFAS 4 gains and losses associated with extinguishments
of debts were reclassified as extraordinary item. SFAS No. 145 provides that
gains and losses associated with extinguishments of debts will be classified as
extraordinary item only if they meet the criteria of APB Opinion No. 30. The application of the requirements of SFAS No.
145 will not have a material impact on the Companys financial position or
results of operations.

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In July 2002, the FASB
issued SFAS No.146, Accounting for Costs Associated with Exit or Disposal
Activities. SFAS No. 146 requires that a liability for costs associated with
an exit or disposal activity be recognized and measured initially at fair value
only when the liability is incurred. SFAS No. 146 is effective for exit or
disposal activities that are initiated after December 31, 2002. The application
of the requirements of SFAS No. 146 will not have a material impact on the
Companys financial position or results of operations.

In November 2002, the
FASB issued Interpretation No. 45 (FIN 45), Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, which clarifies disclosure and recognition/measurement
requirements related to certain guarantees. The disclosure requirements are
effective for financial statements issued after December 15, 2002 and the
recognition/measurement requirements are effective on a prospective basis for
guarantees issued or modified after December 31, 2002. The application of the
requirements of FIN 45 will not have a material impact on the Companys
financial position or results of operations.

In December 2002, the
FASB issued SFAS No. 148, Accounting for Stock Based CompensationTransition
and Disclosureas Amendment to FAS 123. SFAS 148 provides two additional
transition methods for entities that adopt the preferable method of accounting
for stock based compensation. Further, the statement requires disclosure of
comparable information for all companies regardless of whether, when, or how an
entity adopts the preferable, fair value based method of accounting. These
disclosures are now required for interim periods in addition to the traditional
annual disclosure. The amendments to SFAS No. 123, which provides for
additional transition methods, are effective for periods beginning after
December 15, 2002, although earlier application is permitted. The amendments to
the disclosure requirements are required for financial reports containing
condensed financial statements for interim periods beginning after December 15,
2002.

E.         Off-Balance
Sheet Arrangements

We do not have any off-balance-sheet
arrangements.

Item
6.             Directors,
Senior Managers and Employees

A.         Directors
and Senior Management

The following is a list of our directors and
senior management, as of the end of June 2003, 2003 followed by a description
of their business background:

|Name                 |  | Age |  | Position                                                
|-------------------- |  | --- |  | --------------------------------------------------------
|Menachem Reinschmidt |  | 43  |  | Chairman of the Board*                                  
|Moshe Rubin          |  | 50  |  | External Director                                       
|Dr. Ora Setter       |  | 51  |  | External Director                                       
|George Balot         |  | 61  |  | Director and to become
  Acting Chief Financial Officer*
|David Sheetrit       |  | 41  |  | Director and Acting Chief
  Executive Officer           
|Ilan Hadar           |  | 38  |  | Chief Financial Officer*                                
|Hanoch Newman        |  | 37  |  | Vice President  Research
  and Development*            

|* | Mr.
  Jacob Ben-Gur, Chairman of the Board of the Company, announced his
  resignation from the position of Chairman of the Board of Director at a
  Company board meeting on January 31, 2002, due to his heavy work load and
  other duties other than as Chairman and Director of the Company. He
  officially resigned on June 5, 2002. 
  Mr. Menachem Reinschmidt became Chairman of the Board of the Company
  on November 2002.  Mr. David Sheetrit,
  who had been the Chief Operating Officer of the Company from January 2001,
  has become the Acting Chief Executive Officer of the Company effective June
  22, 2003. Mr. Ilan Hadar the Chief Financial Officer of the Company up until
  July 26, 2003. Beginning June 27, 2003 Mr. George Balot will share the duties
  with Mr. Hadar until Mr. Hadars leaving the Company at the end of July 2003
  at which time Mr. Balot will be the sole Acting Chief Financial Officer of the
  Company on a part-time basis until September 30, 2003.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

33

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Menachem Reinschmidt, Chairman of the
Board of the Company since November 2002 and Director of the Company since
2001; Mr. Reinschmidt has been Director of Marnetics Ltd., and Director of
Marnetics, Inc, since the establishment of both entities. Mr. Reinschmidt
established Marnetics in 1998, and was the first Chief Executive Officer of
Marnetics.  One of the leading data
communication experts in Israel, Mr. Reinschmidt has 18 years of
experience in the most advanced fields of computer networks, including design,
analysis, integration and development. 
His expertise incorporates advanced networking topics, including frame
relay, TCP/IP, Internet architecture, ATM, Local Area Networks, routers and
switches, voice-over IP, etc. Prior to founding Marnetics, from 1993 to 1997
Mr. Reinschmidt was President of ATLan, a software development company
located in Tel Aviv.  He is a lecturer
and the author of the Hebrew bestseller Local Area Networks for PC and Compatibles.

Moshe Rubin,
External Director of the Company since 1999, currently serves as a Financing
Consultant for the Jerusalem branch of Pama Car Financing. For 15 years, he
operated the Dihatsu car dealership, which he opened in Herzliya.  He has also been involved in businesses in
car parts, accessories, and car maintenance.

Dr. Ora Setter, External Director of the Company since
November 2002, currently serves also as External Director on the board of
directors of Israeli Ligtharege and Supply Ltd. and Ravad Ltd., two publicly
traded companies. Dr. Setter has 20 years of experience in performing consulting to
variety of large enterprises in Israel including the major industrial companies
and as well as political parties. Dr. Setter established few start-up companies
in the area of knowledge management and e-learning. She is a very active
lecturer in Israel and in international conferences. Dr. Setter has been for 10
years a lecturer in the Business School of Management at Tel Aviv University.
Dr. Setter received her doctorate of business from the Business School of
Management at Tel Aviv University.

George Balot, Director of the Company since December 2002
and Director of Marnetics Ltd., member of the Audit Committee of the Company
until June 2003, and Acting Chief Financial Officer effective as of June 15,
2003. Mr. George Balot has extensive experience in the financial management of
medium and large corporations in addition to non-profit organizations in
the USA and Israel.  Before coming to Israel in 1978, Mr. Balot, a
Certified Public Accountant (USA) was a manager with KPMG in NY, USA.  In
Israel Mr. Balot has held positions as CFO at large high tech companies, a
large non-profit educational institution with branches
located located throughout the entire country, and also as an independent
financial consultant to high tech companies and others.  Mr.
Balot holds a B.S. from the Rutgers University School of Business
Administration, NJ, USA, where he majored in Accounting.

David Sheetrit, Director since April 2003,
and Acting Chief Executive Officer since June 22, 2003, has also served
as Marnetics Ltds President and Director since April 2003. Since January 2001
Mr. Sheetrit was the Chief Operating Officer of the Company and Marnetics
Ltd.Mr. Sheetrit serves also as a Director of Marnetics Inc.   Before joining Marnetics, Mr. Sheetrit was
Head of the Tel Aviv Branch of the College of Management since 1995. In this
capacity he supervised the operations, investments, marketing activities and
academic programs of the College, which was comprised of 3,000 students and 200
faculty and staff. Mr. Sheetrit has lectured at various colleges and academies
and served as an independent organizational and business consultant to various
organizations and institutions. He holds a M.Sc. degree in Industrial
Management/Business Administration from Ben Gurion University.

Ilan Hadar,Chief Financial Officer of the Company until
June 26, 2003. Mr. Hadar is responsible for financial management and
control and has been with the Company since May 2002. Mr. Hadar possesses ten
years of experience in financial management positions with particular expertise
in facilitating IPOs, M & A and maintaining shareholder and investor
relationships. Additionally, Mr. Hadar has extensive experience in managing the
operations of publicly traded enterprises in various operating sectors. Prior
to joining the Company, Mr. Hadar served as the Chief Financial Officer of
Kardan Technologies Ltd (TASE: KRTC) where he participated in the team that led
the IPO of the company. Mr. Hadar was also a member of the investment
activities team of the company in the e-commerce sector. Prior to Kardan
Technologies Mr. Hadar spent several years with Nessuah Zannex Ltd. (TASE:
NESU), a leading Israeli full service brokerage house, the Israeli
representative of US Bancorp Piper Jaffray and Invesco. Mr. Hadar led the
merger between Nessuah and Zannex to form the current structure of that
company. Today Mr. Hadar serves as External Director with the NZ portfolio
Management Ltd. Mr. Hadar is a Certified Public Accountant (Israel and USA) and
holds M.B.A. in Finance and B.A. in Economics & Accounting from the Hebrew
University in Jerusalem. Beginning
the end of July 2003, Mr. Hadar will no longer be an employee of the Company.

34

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Hanoch Newman,Vice President Research and Development, joined Marnetics in June 2000 as its Vice
President of Research and Development. 
He is a specialist in real-time systems, embedded systems, UNIX/WIN,
C++/C communication, and device drivers. 
He also has vast experience in computer programming, with expertise in
TCP/IP and other Internet and Communication protocols, as well as system
management.  His past experience
includes serving as Project Manager at Elron Software NCC from 1999 to 2000,
R&D Manager at CT Motion (start-up) from 1998 to 1999, and CTO and MIS in
the Israeli Air Force for five years prior thereto.  Mr. Newman will be leaving the Company on a full time basis in
June 2003 but will possibly be available for consultation dependent on present
negotiations with the Company. He holds a B.A. in Computer Sciences.

Changes in
the Composition of the Board of Directors during the Year 2002/2003

During 2002 Mr. Jacob Ben Gur, former
Chairman of the Board, Mr. Moshe Kessner, Mr. Yossi Shelly, External Director
and Mr. Joshua Piasetzky resigned from their office as directors. Each of the
above resignations were for personal reasons and none of the directors had
disagreements with the Company on any matter relating to the Companys
operations, policies or practices.

On July 2002 Mr. Pekka Roine joined the Board
of Directors and replaced Mr. Ilja Bobbert as a Director. On March 4, 2003, Mr,
Roine resigned from the Board of Directors.

On October 13, 2002 Mr. Yossi Shelly resigned
from his office as External Director and Dr. Ora Setter was elected as the
second External Director on November 26, 2002.

On October 22, 2002 Mr. David Sheetrit, Chief
Operating Officer, joined the Board of Directors temporarily until the Annual
General Meeting at which time he resigned. As of April, 2003, Mr. Sheetrit
rejoined the Board of Directors.

On December 11,
2002 George Balot was appointed as a member of the Companys Board of Directors
and Marnetics Ltd.  and Audit Committee
of the Company. Upon Mr. Balots appointment as Acting Chief Financial Officer,
he ceased to be a member of the Audit Committee of the Company.

In April 2003 David
Sheetrit was appointed as a member of the Companys Board of Directors.

Term and Rights to Designate Board Members

The Articles of
Association of the Company provide that at the Companys annual meeting of
shareholders, each director is elected for a period of one year and serves
until the next such meeting or until his or her successor is duly elected and
qualified.  Directors may be re-elected
annually without limitation.

The Companys
directors, with the exception of two external directors representing the public
(who are paid in accordance with the provisions of the Companies Law, as
defined below), do not currently receive any compensation for their services as
directors except for George Balot whom receives a per meeting attendance fee of
US $200. Certain shareholders and option-holders of the Company have the right
to nominate and, pursuant to shareholder agreements, have elected their
designees for the Companys Board of Directors.

The former Marnetics
Subsidiary shareholders agreed that they will vote in favor of certain nominees
for Director of the Company as follows: (i) one nominee designated by ECI
Telecom Ltd. (ECI) in the event  that
ECI holds 12.5% of the issued and outstanding share capital of the Company, or
two nominees in the event that ECI holds 25% of the issued and outstanding
share capital of the Company,  (ii) one
nominee designated by STI Ventures Investments No. 2 B.V. (STI), as long as
STI holds not less than 5% of the outstanding share capital of the Company, as
well as STI can appoint one member as an observer to the Board of Directors of
the Company, (iii) one nominee designated collectively by Prime Technology
Ventures NV, Docor International BV and Ronchal Investments NV, as long as the
Docor Group holds no less than 5% of the outstanding share capital of the
Company, and (iv) one nominee designated by Linkware Ltd. (a company under the
control of Mr. Reinschmidt) as based on an agreement between the shareholders.  Mr. Pekka Roine represented collectively by
Prime Technology Ventures NV, Docor International BV and Ronchal Investments NV
and resigned during year 2003. To date, STI has not yet designated a nominee
for the Companys board and ECI has only designated one director nominee Mr.
Joshua Piasetzky that served until October 7, 2002.

35

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Alternate
Directors

The Articles of
Association of the Company provide that any director may, by written notice to
the Company, appoint another director or any other person to serve as an
alternate director, and may cancel such appointment.  An alternate director has the number of votes equivalent to the
number of directors who appointed him. 
The term of appointment of an alternate director may be for one meeting
of the Board of Directors or for a specified period.

External
Directors

Under the Israel
Companies Law (the Companies Law), public companies are
required to elect two external directors who must meet specified standards of
independence.  Companies that are
registered under the laws of Israel and whose shares are listed for trading on
a stock exchange outside of Israel, such as the Company, are defined as public
companies and under such definition are subject to the requirement of electing
two external directors.  An external
director may not have had during the previous two years any economic
relationship with the Company. 
Controlling shareholders of a company, 50% shareholders, and their
relatives or employees cannot serve as external directors.  External directors are elected by
shareholders.  No individual shall be
appointed as an external director if his other positions or affairs create or
are liable to create a conflict of interest with his position as director, or
if they are liable to constrain his ability to serve as director.  The shareholders voting in favor of their
election must include at least one-third of the shares of the non-controlling
shareholders of the Company who are present at the meeting.  This minority approval requirement need not
be met if the total shareholdings of the non-controlling shareholders who vote
against their election represent 1% or less of all of the voting rights in the
Company.  Under the Companies Law,
external directors serve for a three-year term, which may be renewed for only
one additional three-year term.

One of our two external
directors, Moshe Rubin, was appointed on October 4, 1999 before the
adoption of the Companies Law and under the previous Israeli corporate
laws.  Pursuant to the provisions of the
Companies Law an external director appointed in accordance with the provisions
of the former corporate governance law shall be deemed an external director
appointed in accordance with the provisions of the Companies Law however the
term of appointment shall be for a five-year period therefore Mr. Rubin shall
remain in office until 2004.

Under the Companies
law, external directors can be removed from office only by the same special
percentage of shareholders as can elect them, or by a court, and then only if
the external directors cease to meet the statutory qualifications with respect
to their appointment or if they violate their duty of loyalty to the
Company.  If, when an external director
is elected, all members of the board of directors of a company are of one
gender, the external director to be elected must be of the other gender.  Any committee of the board of directors must
include at least one external director. 
An external director is entitled to compensation as provided in
regulations adopted under the Companies Law and is otherwise prohibited from
receiving any other compensation, directly or indirectly, in connection with
such service.

The Companys Amended
and Restated Articles of Association provides that the Board of Directors shall
consist of a minimum of two (2) and a maximum of eleven (11) directors.  Each director, except for External Directors,
shall serve as a director from the time of appointment until the next Annual
General Meeting. As mentioned above, External Directors elected after the
adoption of the Companies Laws in 2000 shall hold office for 3 year terms and
an External Director elected under the previous Israeli corporate statute, the
Companies Ordinance, such as the Companys external director, Moshe Rubin,
shall serve for five-year terms, until 2004. Dr. Ora Setter, appointed after
the adoption of the Companies Law in 2000, will serve for three-year terms or
until 2005.

The Amended and
Restated Articles of Association provides that directors may be removed only
for cause by a majority of shareholders. The Companies Law also provides that a
director shall be removed from office in one of the following events: (i) if he
has resigned or removed in accordance with the provisions stated therein; (ii)
upon conviction for a criminal offence as detailed therein; (iii) in the event
that a court has ordered his removal; (iv) in the event that he has been
declared bankrupt.

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Liability
of Officers and Directors

The Companies Law
provides that an Israeli company cannot exculpate an office holder from
liability with respect to a breach of his duty of loyalty, but may exculpate in
advance an office holder from his liability to the company, in whole or in
part, with respect to a breach of his duty of care.  The Companys Articles of Association provide that, subject to
any restrictions imposed by corporate law, the Company may enter into a
contract for the insurance of the liability of any of the Companys office
holders with respect to an act performed by him in his capacity as an office
holder and regarding:

| |  | a breach of his duty of
  care to the Company or to another person;                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                            
| |  | a breach of his duty of
  loyalty to the Company, provided that the office holder acted in good faith
  and had a reasonable basis to assume that his act would not prejudice the
  Companys interests; or
| |   |                                                                                                                                                                                                            
| |  | a financial liability
  imposed upon him in favor of another person.                                                                                                                                       

In addition, the Company may indemnify an
office holder against:

| |  | a financial liability
  imposed on him in favor of another person by any judgment, including a
  settlement or an arbitrators award approved by a court in respect of an act
  performed in his capacity as an office holder; and                                                                                                                                                                                    
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  | reasonable litigation
  expenses, including attorneys fees, expended by such office holder or
  charged to him by a court, in proceedings the Company institutes against him
  or instituted on the Companys behalf or by another person, or in a criminal
  charge from which he was acquitted, or a criminal charge for which he was
  convicted, providing such charge does not require proof of criminal intent.

These provisions are
specifically limited in their scope by the Companies Law, which provides that a
company may not indemnify an office holder, nor enter into an insurance
contract, which would provide coverage for any monetary liability incurred as a
result of any of the following:

| |  | a breach by the office
  holder of his duty of loyalty unless the office holder acted in good faith
  and had a reasonable basis to believe that the act would not prejudice the
  company;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                            
| |  | a breach by the office
  holder of his duty of care if such breach was done intentionally or in
  disregard of the circumstances of the breach or our consequences;                        
| |   |                                                                                                                                                                                            
| |  | any act or omission done
  with the intent to derive an illegal personal benefit; or                                                                                                       
| |   |                                                                                                                                                                                            
| |  | any fine levied against
  the office holder.                                                                                                                                               

Under the Companies
Law, the Companys shareholders may amend the Articles of Association to
include either of the following provisions:

| |  | A provision authorizing
  the Company to grant in advance an undertaking to indemnify an office holder,
  provided that the undertaking is limited to types of events which the board
  of directors deems to be anticipated and limited to an amount determined by
  the board of directors to be reasonable under the circumstances; or
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                          
| |  | A provision authorizing
  the Company to retroactively indemnify an office holder.                                                                                                                                                                                                                                                       

37

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In addition, pursuant
to the Companies Law, approval of the Companys audit committee and the Companys
Board of Directors and, in specified circumstances, by the Companys
shareholders, must be obtained for the indemnification of, and procurement of
insurance coverage for, the Companys office holders for the following actions:

| |  | breach of duty of care by
  any office holder owed to the Company or any other person;                                                                                                                      
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                             
| |  | breach of fiduciary duty
  by any office holder owed to the extent that such office holder acted in good
  faith and had a reasonable basis to assume that the action would not
  prejudice the Company; and
| |   |                                                                                                                                                                                                             
| |  | any financial liability
  imposed on any office holder for the benefit of a third party as a result of
  any act or omission such office holder committed as an office holder of the
  Company.             

As a result of a Shareholders
Resolution dated November 26, 2002, the Company has entered into an
indemnification agreement with the officers and directors of the Company as of
March 13, 2003 and entered into an agreement with each new director. Such
agreements contain provisions which endeavor to limit the personal liability of
the officers and directors, both to the Company and to our shareholders, for
monetary damages resulting from breaches of certain of their fiduciary duties
as directors and officers of the Company. 
In particular, such agreements provide that the Company will indemnify
such individuals to the fullest extent permitted by the Companies Law, as such
rights shall from time to time be amended or limited, against all expense,
liability, and loss reasonably incurred or suffered by the indemnitee as a
result of serving as an officer or director or employee of the Company, or any
affiliate thereof or any other entity at the request of the Company.

In addition, the
Company has obtained reimbursement indemnity insurance to reimburse directors
and officers of the Company for losses sustained as a result of any claim
arising from a wrongful act, individually or collectively, in the discharge of
their duties or in breach of their fiduciary duties solely in their capacity as
officers and directors of the Company, and to reimburse the Company for losses
sustained as a result of any claim arising from any such wrongful act where an
indemnity has been given or lawfully is required to be given to officers or
directors of the Company.

Consequently, under
the Companys Amended Articles of Association, the Company may indemnify its
officers and directors for financial obligations imposed on them in favor of a
third party by a court judgment, including a compromise judgment or a
court-approved arbitrators decision, as well as for concomitant reasonable
legal expenses, including attorneys fees, as a result of any claim arising
from a wrong act in the discharge of their duties in their capacity as officers
or directors of the Company which could materially adversely affect the
business, prospects, financial condition, or results of operations of the
Company.

Furthermore, the
ability of United States shareholders to recover monetary damages from officers
and directors of the Company for certain breaches of their fiduciary duties may
be significantly limited.

Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to officers, directors, and controlling persons of the Company
pursuant to the foregoing provisions or otherwise, the Company has been advised
that in the opinion of the U.S. Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable in the United States.

B.          Compensation

The Companys directors
do not currently receive any compensation for their services as directors.  In addition, under the Companies Law,
external directors are entitled to annual compensation plus per meeting
attendance fee.  The Company currently
pays its external directors an annual fee of US $3,100 and per meeting
attendance fee of US $200. Every two telephone conference calls are considered
one meeting.  Mr. Yossi Shelly also
received travel expenses of fifty cents per kilometer. The Company granted Mr.
Moshe Kessner, who was a member of the board of directors of the Company and in
light of his services to the Company, options to purchase 21,000 Ordinary
Shares of the Company, which shall vest over a period of 12 months from the
date of his nomination. Mr. George Balot receives a per meeting attendance fee
of US $200. In addition, upon Mr. Balot assuming the function of Acting Chief
Financial Officer of the Company he will receive compensation of $2,000 per
month for 70 hours per month of work for the Company.

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Effective December 2, 2001, Marnetics Ltd.
entered into a services agreement with Netlogic Ltd., a company under the
control of Menachem Reinschmidt, Chairman of the Board of the Company, and
provides on a non-exclusive basis, executive managerial and other related
services with respect to the Company, Marnetics Ltd. and any of its affiliated
companies, as may be prescribed from time to time by the board of directors of
Marnetics,

The Board of Director after receiving the
approval of the Audit Committee, decided to approve an Addendum to the Netlogic
Ltd. Services Agreement (effective December 2, 2002) for six (6) months, from
December 2, 2002 to June 2, 2003. The position of Mr. Reinschmidt during the
period with the Company was that of Active Chairman of the Board of Directors
on a part time basis of fifty percent of his time. Among the duties of the
Active Chairman will be to approach companies for potential partnerships,
merger and acquisitions investments and selling the Companys technology and
intellectual property. The compensation for such duties will be a monthly gross
fee of $5,000 (five thousand dollars) plus Value Added Tax. In addition, the
Company will supply Mr. Reinschmidt with a leased car and cellular phone for
the duration of the extension of the Netlogic Ltd. Services Agreement.

A Second Addendum to this Services Agreement
effective December 2, 2002, was signed on June 2, 2003, subject to shareholder
approval, for an additional period from June 3, 2003 and to expire December 2,
2003.

Mr. David Sheetrit who
is the Chief Executive Office of the Company as of June 2003, the Chief
Operating Officer of the Company since January 2001, and Director in the
Company since April 2003, provides services under a services agreement and
receives monthly compensation of $4,000 plus a Company car and is supplied with
a cellular phone, exactly as when he was the Chief Operating Officer of the
Company.

Mr. Ilan Hadar will be
leaving the Company effective the end of July 2003.

Based on a signed
agreement June 22, 2003, effective June 15, 2003 and in effect until September
30, 2003, Mr. George Balot will be the Acting Chief Financial Officer of the
Company on a part-time basis of $2000 a month for 70 hours of work, with an
additional $45 per hour for every hour over that time.  In addition, Mr. Balot is presently
negotiating an agreement with the Company to receive a finders fee based only
on success in selling the Companys technology and/or finding an appropriate
merger partner for the Company.

Mr. Hanoch Newman who
is VP Research and Development of the Company provided services to the Company
during 2003 at a reduced rate of 80% of his time. In addition to receiving his
salary at an 80% rate, he was entitled to receive from the Company sales
commission of 8 percent of sales accomplished through his efforts. Mr. Newman
will be leaving the Company in June 2003 and will possibly be available for
consultation services dependent on negotiations between the Company and him.

C.          Board
Practices

See Item 6A  Director and Senior Management
for period that our directors and senior management are serving.

Committees
of the Board of Directors  Audit Committee

The Companies Law also
provides that public companies must appoint an audit committee.  The responsibilities of the audit committee
include identifying irregularities in the management of the Companys business
and approving related-party transactions as required by law.  An audit committee must consist of at least
three members, and include all of the Companys external directors.  However, the chairman of the board of
directors, any director employed by the Company or providing services to the
Company on a regular basis, any controlling shareholder and any relative of a
controlling shareholder may not be a member of the audit committee.  An audit committee may not approve an action
or a transaction with a controlling shareholder, or with an office holder,
unless at the time of approval two external directors are serving as members of
the audit committee and at least one of the external directors was present at
the meeting in which an approval was granted.

39

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In addition, the
Companies Law requires the board of directors of a public company to appoint an
internal auditor nominated by the audit committee.  A person who does not satisfy the Companies Laws independence
requirements may not be appointed as an internal auditor.  The role of the internal auditor is to
examine, among other things, the compliance of the Companys conduct with
applicable law and orderly business practice. 
Following the combination transaction between the Company and Marnetics,
Ltd., the Company has decided to appoint a new internal auditor whose candidacy
will be recommended by the Audit Committee and approved by the Companys Board
of Directors.

The Company has an
audit committee that consists of Ora Setter, Moshe Rubin and George Balot. Mr.
Balot will be resigning as a member of the audit committee upon his assuming
the function of Acting Chief Financial Officer during June 2003. The audit
committee exercises the powers of the Board of Directors with respect to the
Companys accounting, reporting and financial control practices.

Advisory Committee

During year 2002 to
further the Companys progress in both marketing and technology, an Advisory
Committee comprised of the following persons that represent both the technology
and the investments made in the Company was formed: Erez Aluf, representing STI
Ventures Investments No. 2 B.V., Moshe Kessner, Joshua Piasetzky representing
ECI Telecom Ltd, and Michael Schlesinger representing Docor International BV.These representatives do not have the power
of board of director membersbut
are advisory in nature to the management of the Company. Since August, 2002 the
Advisory Committee has been inactive.

D.           Employees

On December 11, 2002 the Board of Directors
resolved to authorize management of Marnetics 
to structure an Employment Stock Option Plan for the year 2003 and to
allocate to employees of Marnetics up to 5 (five) per cent of the issued and
outstanding share capital of Marnetics on a fully diluted basis. The program has not yet gone into effect.

On March 31, 2003 the
Company employed approximately 13 persons, of whom six (6)  worked in research and development, two (2)
in marketing and sales, and five (5) in general and administrative. As of April
26, 2003, the Company decided to lay off the majority of the employees of the
Company and its wholly-owned subsidiary, Marnetics Ltd. in the areas of
marketing, sales and research and development. The remaining employees are in
the area of administration and will be left for the next few months, possibly
to the end of the year 2003. A new updated budget was approved that reflects
the shut down of the research and development, and marketing and sales
operations of the Company and Marnetics Ltd.

A Second Addendum to this Services Agreement
effective December 2, 2002, was signed June 2, 2003, subject to shareholder
approval, for an additional period from June 3, 2003 and to expire December 2,
2003, whereby Mr. Menachem Reinschmidt
through the company Netlogic Ltd. is dedicating 50% of his time to the Company
as an active Chairman. The compensation for such duties will be a
monthly gross fee of $5,000 (five thousand dollars) plus Value Added Tax. In
addition, the Company will supply Mr. Reinschmidt with a leased car and
cellular phone for the duration of the extension of the Netlogic Ltd. Services
Agreement. See Item 7.B. Related Party
Transactions  Netlogic Ltd.

Mr. David Sheetrit who
is the Acting Chief Executive Officer as of June 2003 of the Company, had been
from January 2001 up until this time the Chief Operating Officer of the Company
and Director in the Company since April 2003, is providing services to the
Company under a services agreement and receives monthly compensation of $4,000
plus a Company car and is supplied with a cellular phone for his use in his
work for the Company, exactly as when he was the Chief Operating Officer of the
Company.

Mr. Ilan Hadar will be
leaving the Company effective the end of July 2003.

Based on a signed agreement
June 22, 2003, effective June 15, 2003 and in effect until September 30, 2003,
Mr. George Balot will be the Acting Chief Financial Officer of the Company on a
part-time basis of $2000 a month for 70 hours of work, with an additional $45
per hour for every hour over that time. 
In addition, Mr. Balot is presently negotiating an agreement with the
Company to receive a finders fee based only on success in selling the
Companys technology and/or finding an appropriate merger partner for the
Company.

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Mr. Hanoch Newman who
is VP Research and Development of the Company provides services to the Company
at a reduced rate of 80% of his time. In addition to receiving his salary at an
80% rate, he is entitled to receive from the Company sales commission of 8
percent of sales accomplished through his efforts. Mr. Newman will be leaving
the Company in June 2003 and will possibly be available for consultation
services dependent on negotiations between the Company and him..

Israeli law, as well as
collective bargaining agreements and orders of the Israeli Ministry of Labor
and Welfare, contain provisions regarding conditions of employment, including,
among other things, the length of the workday, minimum wages, insurance for
work-related accidents, the determination of severance pay, and adjustments of
wages in accordance with inflation.  The
Company generally provides our employees with benefits and working conditions
at or above the required minimums. 
Furthermore, Israeli employees and employers are required to pay
predetermined sums to the National Insurance Institute, which is similar to the
United States Social Security Administration. 
Since January 1, 1995, such amounts have included payments for national
health insurance.  The payments to the
National Insurance Institute are approximately 14.6% of wages, of which 4.9%
are contributed by the Company pursuant to Israeli law requirements, and the
rest, 9.7%, by the employee.

Most of the Companys
employees are insured through a Managers Insurance Policy, which offers a
combination of pension plans, insurance in cases of death and injury, and
retirement and severance pay benefits. 
An amount equal to 5% of an employees gross salary is contributed to
the Managers Insurance Policy by the Company and an additional 5% by the
employee.  Another component of up to
2.5% paid by the Company covers insurance for damages sustained by employees
due to loss of work capability.  An
additional amount equal to 8.3% is funded by the Company to cover severance
liability.

In addition, most of
the Companys employees have an Educational Fund Savings Plan pursuant to which
the Company contributes an amount equal to 7.5% of the employees salary and
the employee contributes an amount equal to 2.5% of his salary.

Obligations of the
Company resulting from the termination of employer-employee relationships are
primarily accounted for through allocations made on behalf of the employees to
various compensation funds, pension funds, and insurance companies within the
framework of Managers Insurance Policies and the Mivtahim Pension Fund,

The wages of most of
the Companys employees are linked to changes of the Israeli standard of living
price index (CPI) as determined by the Israeli Bureau of Statistics.

The total overhead
expenses for wages in Israel are usually, approximately 30%.

As of May 31, 2003, the
Company had no outstanding loans to employees and officers of the Company
except to Mr. Dov Strikovsky, the President,
Chairman and former CEO, who is no longer
employed by the Company but is a significant shareholder of the Company.  See Item 7B-Related Party Transactions.

E.         Share
Ownership

See Item 7: Major Shareholders and Related Party Transactions.

Stock Option Plan

In connection with the June 1, 2000 share
exchange agreement (the agreement) signed between the Company and Marnetics,
the Board of Directors of the Company adopted an unwritten Option Plan (the
Option Plan).  The Option Plan provides
for the grant of options to purchase up to an aggregate of 1,000,000 Ordinary
Shares to directors, key employees and consultants of the Company. The Board of
Directors of the Company will determine the terms of the grants. Under the
Option Plan, the Company granted, to a company under the control of the former
CEO and chairman of the board of the Company, 400,000 fully vested options to
purchase shares at the exercise price of $3. With
respect to these options non-cash compensation expenses totaling $2,000,000
were recorded and charged to earnings in accordance with APB 25 Accounting for
Stock Issued to Employees.

The Companys board of directors adopted a
written stock option plan in its meeting of June 17, 2001. As of May 31, 2003,
279,206 options are allocated to employees on a fully diluted basis. In
addition, former employees of Stav, have been allocated 157,143 options, which
are fully vested. There remain 552,224 options that are unallocated.

41

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On December 11, 2002 the Board of Directors
resolved to authorize management of Marnetics 
to structure an Employment Stock Option Plan for the year 2003 and to
allocate to employees of Marnetics up to 5 (five) per cent of the issued and
outstanding share capital of Marnetics on a fully diluted basis. The program
has not yet gone into effect.

Item
7.             Major
Shareholders and Related Party Transactions

A.          Major
Shareholders

The following table identifies, as of May 31,
2003, certain information with respect to the beneficial ownership of
securities of the Company of each person or entity by the Company to be the
beneficial owner of five percent (5%) or more of the Ordinary Shares of the
Company:

|Name and Address ofBeneficial Owner  |  | Number       |  | Percent(1)
|------------------------------------ |  | ------------ |  | ----------
|                                     |  |              |  |           
|Linkware Ltd.                        |  | 1,740,575(2) |  | 18.77%    
|3 Hadror Street                      |  |              |  |           
|P.O. Box 73                          |  |              |  |           
|Hod Hasharon 45100 Israel            |  |              |  |           
|                                     |  |              |  |           
|Dov Strikovsky                       |  | 985,714(3)   |  | 10.63%    
|83 Akiva Street                      |  |              |  |           
|Raanana, Israel                     |  |              |  |           
|                                     |  |              |  |           
|ECI Telecommunications
  Ltd.        |  | 1,187,439(4) |  | 12.81%    
|34 Hasivim Street                    |  |              |  |           
|Kiryat Aryeh Industrial
  Park       |  |              |  |           
|Petach Tikva Israel                  |  |              |  |           
|                                     |  |              |  |           
|STI Ventures
  Investments No. 2 B.V |  | 1,180,907    |  | 12.74%    
|Hullenbergweg
  379                  |  |              |  |           
|1101 Cr.
  Amsterdam                 |  |              |  |           
|Zuide  Oost                         |  |              |  |           
|The
  Netherlands                    |  |              |  |           
|                                     |  |              |  |           
|Prime
  Technology Ventures NV       |  | 630,550      |  | 6.80%     
|Stroombaan
  6-8                     |  |              |  |           
|1181 VX
  Amstelveen,                |  |              |  |           
|The
  Netherlands                    |  |              |  |           

|(1) | The number of shares
  beneficially owned is determined under rules promulgated by the Securities
  and Exchange Commission, and the information is not necessarily indicative of
  beneficial ownership for any other purpose. 
  Under these rules, beneficial ownership includes any shares as to
  which the individual has sole or shared voting power or investment power and
  also any shares that the individual has the right to acquire within 60 days
  after May 31, 2003, through the exercise of any stock option or other
  right.  The inclusion herein of such
  shares, however, does not constitute an admission that the named shareholder
  is a direct or indirect beneficial owner of such shares.  Unless otherwise indicated, each person or
  entity named in the table has sole voting power and investment power, or
  shares such power with his or her spouse, with respect to all shares of
  capital stock listed as owned by such person or entity. This does not include
  an unallocated pool (including prior to merger) of 552,224 options in the
  calculation of the percentages.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|(2) | Includes 302,266 shares
  that may be acquired pursuant to options that are presently or will become
  exercisable within 60 days at an exercise price of par value per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|(3) | Includes 550,000 shares
  that may be acquired pursuant to options with an exercise price of $3.00 per
  share, which are presently or will become exercisable within 60 days by O.S.I
  Limited which is controlled by a trust, the beneficiaries of which are family
  members of Dov Strikovsky.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

42

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As of May 31, 2003,
1,008,809 Ordinary Shares of the Company were held of record in the United
States.  Such Ordinary Shares were held
by five (5) record holders and represented 13.7% of the total Ordinary Shares
then outstanding (10.9% on fully diluted basis).  On May 31, 2003, 6,353,581 of the Ordinary Shares were held of
record outside of the United States. 
Such shares were held by seventeen (17) record holders and represented
86.3% (89.1% on a fully diluted basis) of the total Ordinary Shares
outstanding.  Since 927,546 of these
Ordinary Shares were held by brokers or other nominees, the number of record
holders in the United States may not be representative of the number of
beneficial holders or where the beneficial holders are resident.

The following table
sets forth certain information as of May 31, 2003, with respect to the
beneficial ownership of shares of Ordinary Shares by each of the Companys
directors and executive officers, individually, and the directors and executive
officers of the Company as a group, assuming conversion of all convertible debt
or preferred stock and exercise of all warrants and stock options by such
person and only by such person.

| |                                                                                                                                                                 |  | Amount and Nature of    |            
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | -----------
| |                                                                                                                                                                 |  | Beneficial Ownership(1) |            
| |                                                                                                                                                                 |  |                         |            
| | Name of Beneficial Owner                                                                                                                                        |  | Number of 
  Shares     |            
| |                                                                                                                                                                 |  |                         |            
| |                                                                                                                                                                 |  |                         |            
| | Menachem
  Reinschmidt, Director and CEO                                                                                                                        |  |                         | 1,740,575(3
| |                                                                                                                                                                 |  |                         |            
| | Moshe
  Rubin, External Director                                                                                                                                |  |                         |           
| |                                                                                                                                                                 |  |                         |            
| | David
  Sheetrit, Director and COO*                                                                                                                             |  |                         | 31,250(4   
| |                                                                                                                                                                 |  |                         |            
| | Ilan
  Hadar, CFO*                                                                                                                                              |  |                         | 27,500(5   
| |                                                                                                                                                                 |  |                         |            
| | Hanoch
  Newman, VP R&D                                                                                                                                         |  |                         | 53,141 (6  
| |                                                                                                                                                                 |  |                         |            
| | All
  Officers and Directors as a Group
  (6 individuals)                                                                                                       |  |                         | 2,451,356  
| |                                                                                                                                                                 |  |                         |            
| | *
  Less than 1%; also during June 2003 David Sheetrit became acting CEO, and at
  the end of July 2003 Ilan Hadar will step down as CFO and leave the Company. | 

(1) The number of
shares beneficially owned is determined under rules promulgated by the
Securities and Exchange Commission, and the information is not necessarily
indicative of beneficial ownership for any other purpose.  Under these rules, beneficial ownership
includes any shares as to which the individual has sole or shared voting power
or investment power and also any shares that the individual has the right to
acquire within 60 days after October 23, 2002, through the exercise of any
stock option or other right.  The inclusion
herein of such shares, however, does not constitute an admission that the named
shareholder is a direct or indirect beneficial owner of such shares.  Unless otherwise indicated, each person or
entity named in the table has sole voting power and investment power, or shares
such power with his or her spouse, with respect to all shares of capital stock
listed as owned by such person or entity. This does not include an unallocated
pool (including prior to merger) of 552,224 options in the calculation of the
percentages nor 115,505 unvested options of employees.

(2) Based on in
7,362,390 Ordinary Shares outstanding as of May 31, 2003 and 1,945,593 options
which are presently or will become exercisable within 60 days after June 30,
2003.

(3) Menachem Reinschmidt
is a controlling shareholder of Linkware Ltd. and, as such, has the ability to
control the voting and disposition of the securities owned by such company. Mr.
Reinschmidt disclaims beneficial ownership of such shares. It includes 302,266
shares that may be acquired pursuant to options which are presently or will
become exercisable within 60 days by Linkware Ltd. at an exercise price of par
value per share.

(4) Includes 31,250
shares that may be acquired pursuant to options which are presently or will
become exercisable within 60 days. Mr. Sheetrit has an option to acquire 2% of
Linkware Ltd. Out of which 1% are presently or will become exercisable within
60 days after October 23, 2002.

(5) Includes 27,500
shares that may be acquired pursuant to options which are presently or will
become exercisable within 60 days.

(6) Includes 53,141
shares that may be acquired pursuant to options which are presently or will
become exercisable within 60 days.

43

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B.         Related
Party Transactions

Sale of
Electrical Business

Effective March 2001
the Company sold to Idan Millenium Investments and Assets Ltd. (IDAN), a
company under the control of Dov Strikovsky, a major shareholder and President, Chairman and former CEO of the
Company, all the fixed assets, inventories,
other assets and liabilities and related goodwill, in the amount of an
appraised value of $2,000,000, relating to the electrical operations for a
consideration of $597,000. The consideration is payable in 25 monthly
installments of $24,000 commencing February 1, 2002. In May 2002 the Company
signed an addendum with IDAN to change the terms of payments to such that the
first 11 installment will be reduced to $7,000 each and the remaining 14
installments will be of $37,000. The Company, considering the collectibility
probability, decided to establish an allowance on the amount not yet collected.
During 2002 $71,000 was repaid on the account of the sale consideration. See
Item 8B  Significant Changes.

Speedwise
Technologies Ltd.

In April 2001, Marnetics Ltd. entered into a
software license agreement with Speedwise Technologies Ltd., a company in which
Marnetics Ltd. owns 14.7% interest.  See
Item 4B  Licensing
Arrangements.

In July 2001, Marnetics Ltd. entered into an
OEM agreement with Speedwise Technologies Ltd., a company in which Marnetics
owns 14.7% of its outstanding shares. Income of $9,000 was made from Speedwise
during year 2002. See Item 4B  Customers and Distributors. The OEM agreement was cancelled in November 2001.

Until September 2000 the Company held 33.6%
of the outstanding shares of Speedwise Technologies Ltd (Speedwise). In
September 2000, Speedwise issued shares which resulted in a decrease in the
Companys holdings in Speedwise to 19.19% and during February 2001 additional
shares were issued to third parties resulting in a further dilution to 14.73%.
In October 2002 Speedwise sold its assets and intellectual property to Orsus
Solutions Ltd., (Orsus) an Israeli technology company, in consideration of
cash and shares. Based on the consideration received by Speedwise, the Company
assesses that the recoverable amount of its holdings in Speedwise will be
$60,000 and as a result an impairment charge of $522,000 has been recorded.

Netlogic
Ltd.

Effective December 2, 2001, Marnetics Ltd.
entered into a services agreement with Netlogic Ltd., a company under the
control of Menachem Reinschmidt, Chairman of the Board of the Company, and
provides on a non-exclusive basis, executive managerial and other related
services with respect to the Company, Marnetics Ltd. and any of its affiliated
companies, as may be prescribed from time to time by the board of directors of
Marnetics.

44

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The Board of Director after receiving the approval
of the Audit Committee, decided to approve an Addendum to the Netlogic Ltd.
Services Agreement (effective December 2, 2002) for six (6) months, from
December 2, 2002 to June 2, 2003. The role of Mr. Reinschmidt during the period
was to hold the office of Active Chairman of the Board of Directors on a part
time basis of fifty percent of his time. Among the duties of the Active
Chairman will be to approach companies for potential partnerships, merger and
acquisitions investments and selling the Companys technology and intellectual
property. The compensation for such duties will be a monthly gross fee of
$5,000 (five thousand dollars) plus Value Added Tax. In addition, the Company
will supply Mr. Reinschmidt with a leased car and cellular phone for the duration
of the extension of the Netlogic Ltd. Services Agreement.

A Second Addendum to this Services Agreement
effective December 2, 2002, was signed on June 2, 2003, subject to shareholder
approval, for an additional period of a few more months, from June 3, 2003 and
to expire December 2, 2003.

Inter
Company Loan Agreement

During September 2002 the Company signed a
loan agreement with Marnetics Ltd, a fully owned subsidiary, whereby Marnetics
Ltd made available to the Company a secured loan of up to $500,000. The
principle of the loan will be linked to the changes in the Israeli CPI. The
interest was set to 4% annually. The loan will be paid until December 31, 2005.
In order to secure the repayment of the loan, the Company agreed to pledge in
favor of Marnetics Ltd. the amounts that will be collected from the account of
the Loans to Significant Shareholder and Former Director and Officer in the
amount of $1,228,000.

Combination
Transaction

Effective December 31, 2000, Stav Electrical
Systems (1994) Ltd. acquired Marnetics Ltd. pursuant to the terms of that
certain share exchange agreement among the Company, Marnetics Ltd. and the security
holders of Marnetics Ltd.  Upon the
closing of that transaction, certain entities and individuals affiliated with
the Company, including Dov Strikovsky, a principal shareholder and the
President, Chairman and former Chief Executive Officer of the Company or
entities affiliated with Mr. Strikovsky, received options to purchase up to
400,000 Ordinary Shares of the Company.

Assignment
of Bank Debt

On May 9, 2001 an agreement was signed between the Company and Bank
Hapoalim Ltd. (Bank) with respect to the Companys debt to the Bank in the
amount of $3,127,000 (the Debt). In accordance with the Bank agreement, the
Bank has agreed to release the Company from its obligation to repay the Debt
and to cancel the floating charge and liens registered in favor of the Bank on
properties of the Company provided that, by May 31, 2001 the Company shall pay
$954,000 to the Bank on account of the Debt (the Repaid Amount) and in
addition the Company shall have assigned to the Bank all its rights with
respect to the debt of the municipality of Hod Hasharon to the Company in the
amount of  $2,173,000. The Company paid
the $954,000 and made the assignment in the aforesaid amount.

In addition, the Company has provided the Bank with a guarantee
of up to $716,000, which decreases in the ratio of NIS 1:2 paid on account of
the outstanding debt of Hod Hasharon, which has been assigned to the Bank (Note
3b). To date Hod-Hasharon has not made any re-payment on account of the debt,
and therefore the guarantee has not decreased. According to the terms of the
Bank Agreement, following November 30, 2002, the Bank is entitled to exercise
the outstanding amount of the guarantee, and since the guarantee has not
decreased, the Company decided to establish an allowance for the guarantee in
full. Nevertheless, the Company and
its representatives are conducting on-going negotiations with Hod-Hasharon for the repayment of the debt to the
Bank, although at present the Company cannot assess what portion of the debt
will be recovered, if any, (and the guarantee decreased accordingly) as a
result of such negotiations, or any future action by the Company. See Item 8A - Legal Proceedings.

45

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Indemnification
by Significant Shareholder

1.  Following the Bank
agreement, on June 30, 2001 an agreement was signed between Mr. Strikovsky and
the Company pursuant to which Strikovsky agreed to reimburse the Company for
the Repaid Amount and any additional amount that the Company may have to pay to
the Bank if the Bank exercises the guarantee related to the debt of Hod
Hasharon. The reimbursement amount of $954,000 is due and payable to the
Company and will be paid in monthly installments of $48,000 commencing on June
1, 2004 until paid in full. All amounts due and payable to the Company are
linked to the Israeli CPI and bear interest of 4% per annum. The reimbursement
amount of $954,000 was not yet recognized as the probability of its realization
is in doubt.

2.   In connection with the Stav/Marnetics
transaction and pursuant to an amendment to the share exchange agreement, Mr.
Strikovsky granted an indemnification to the former shareholders of Marnetics
Ltd. against certain losses or damages related to the Electrical Business and
had deposited 200,000 shares of the Company held by him in escrow as security
for his indemnification obligations.

3. 
During the audit of the financial statements of Stav Electrical Systems
(1994) Ltd. for the year ended December 31, 2000, it was discovered that excess
advances were paid to certain suppliers in the amount of $0.5 million.  On June 30, 2001, Mr. Strikovsky, the
Company and the former shareholders of Marnetics Ltd. entered into a separate
indemnification agreement that further defined, clarified and expanded the
terms of the initial indemnification, added indemnification obligations related
to the bank debt assignment (as described above) and provided for an additional
100,000 shares of the Company held by Mr. Strikovsky to be held in escrow as
security for such indemnification obligations. 
Under this indemnification agreement, Mr. Strikovsky agreed to:

| |  | Reimburse the Company for
  US $954,000 which is the amount the Company has paid to the bank pursuant to
  the debt assignment described above, to be paid in monthly installments of US
  $48,000 commencing June 1, 2004 until paid in full. All amounts due and
  payable to the Company are linked to the Israeli CPI and bear interest of 4%
  per annum. The reimbursement amount of $954,000 was not yet recognized as the
  probability of its realization is in doubt; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | Guaranty the repayment of
  $0.5 million to the Company by certain suppliers of the Company in connection
  with excess advances made to such suppliers by the Company in the year-ended
  December 31, 2000.  Such sum was paid
  to the Company in July 2001 by realization of bank guarantees in favor of the
  Company.                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | To indemnify the Company
  for any amount it may pay to Bank Hapoalim in the future under the guarantee
  granted by the Company in favor of the bank under the debt assignment or for
  any losses the Company may incur in connection with such debt assignment
  documents.                                                                                                                                                                                                     

4.   The Company and Mr. Strikovsky were named as a
defendant in a claim for specific performance of an agreement allegedly entered
into by the Company and the plaintiff in April 1999 (the Agreement) as well
as damages as a result of a breach of the agreement. On July 2, 2001, due to
the fact that no defense and/or reply were provided by the Company or Mr.
Strikovsky, judgment was entered against the Company and Mr. Strikovsky in the
amount of $725,000. On February 7, 2002 the Company filed a motion to vacate
the judgment and on February 27, 2002 the court rejected the motion. The
Company filed an appeal on the court decision which was accepted by the Supreme
Court of the State New York with instructions to allow evidentiary hearing. The
hearing was held on May 22, 2003 and the Company is awaiting the courts
decision. The plaintiff proposed to settle the suit for $250,000 and while the
Company was willing to further negotiate a substantially lower amount, in light
of the plaintiffs position the Company decided to reject the proposal. In 2001
the Company has established an allowance in the amount of $750,000 to provide
for its possible exposure. In light of recent developments the Company
decreased the allowance by $500,000 to $250,000 which, in light of the judgment
against the Company and the settlement offer proposed, represents a
conservative estimate of the probable exposure. See Item 8A (1)  Financial Information -Legal Proceedings.

Loans to
Significant Shareholder and Former Director and CEO

The Company has, from
time-to-time, made loans to Dov Strikovsky during the period of time he was
Chairman of the Board of Directors, President, and Chief Executive Officer of
the Company.  At December 31, 1997,
1998, and 1999 the amount of such loans outstanding was US $1,151,000, US
$1,443,000 and US $1,570,000 respectively. 
Such loans did not bear interest through December 31, 1997.  (Such loans currently linked to the Israeli
Consumer Price Index and bear interest at the rate per annum equal to LIBOR
plus 2 %.)  In addition, during 1999 and
2000, the Company inadvertently made excess advances to Mr. Strikovsky.  Upon discovery of this error, Mr. Strikovsky
repaid to the Company the amount of such excess advances.

46

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In preparation for its
initial public offering, in April 1998, the Company entered into an agreement
with Mr. Strikovsky which provided that he would pay interest only on such
loans through October 1, 1998 and will amortize the principal amount, and pay
interest thereon, commencing on January 1, 2000 and terminating on December 31,
2003.  In September 1998, such agreement
was superceded by an agreement pursuant to which Mr. Strikovsky agreed to repay
such loans together with the interest thereon, on or prior to November 25,
2000, subject to extension in the sole discretion of the disinterested members
of the Board of Directors of the Company. 
Mr. Strikovsky applied the net proceeds of the sale in the Companys
initial public offering of a number of his Ordinary Shares, approximately US
$522,000, and also agreed to apply 50% of all dividends paid, net of taxes, on
the Ordinary Shares owned by him to the prepayment of such loans.  Pursuant to the September 1998 agreement, in
1999, the disinterested members of the Companys Board of Directors voted to
extend the repayment terms of the net loan. 
The loan is currently payable in eight annual installments, which
commenced in December 31, 2000 and shall be repaid in full by December 31,
2007.  First payment was made by way of
applying Mr. Strikovskys net proceeds of the sale in the Companys initial
public offering in the amount of $522,000. In September, 1999 a dividend that
was paid to Mr. Strikovsky in the sum of $90,000, and he applied half of this
amount, $45,000 towards repayment of the loan.

During August,
September 2002 Mr. Strikovsky paid the Company sum of $225,000 including
interest. This amount credited first against the balance of its currents
account in the sum of $87,000 and the sum of $138,000 was credited against the
balance due of the loan.

Mr. Strikovsky did not
make further payments towards this loan. The Company notified Mr. Strikovsky of
its default and is involved in ongoing legal efforts aimed at collecting
amounts due from Mr. Strikovsky and the companies under his control..

At December 31, 2001
the Company reassessed the collectibility of the net loan, in the amount of
$1,228,000 granted to Mr. Strikovsky in previous years, in accordance with
provisions of SFAS No. 114 Accounting by Creditors for Impairment of a Loan,
and resolved, considering the probability of its collectibility, to establish a
loan loss allowance for the entire amount. Income from impaired loan will be
recorded using the cash method.

C.         Interests
of Experts and Counsel

Not Applicable

Item
8.             Financial
Information

A.          Financial
Information

See Item 18-Financial Statements.

Legal Proceedings

1.          The Company and Mr. Strikovsky was named as a
defendant in a claim for specific performance of an agreement entered into by
the Company and the plaintiff in April 1999 (the Agreement) as well as
damages as a result of a breach of the agreement. On July 2, 2001, due to the
fact that no defense and/or reply were provided by the Company or Mr.
Strikovksy, judgment was entered against the Company in the amount of $725,000.
On February 7, 2002 the Company and Mr. Strikovsky filed a motion to vacate the
judgment and on February 27, 2002 the court rejected the motion. The
Company filed an appeal on the court decision which was accepted by the Supreme
Court of the State New York with instructions to allow evidentiary hearing. The
hearing was held on May 22, 2003 and the Company is awaiting the courts
decision. The plaintiff proposed to settle
the suit for $250,000 and while the Company was willing to further negotiate a
substantially lower amount, in light of the plaintiffs position the Company
decided to reject the proposal. In 2001 the Company has established an
allowance in the amount of $750,000 to provide for its possible exposure. In
light of recent developments the Company decreased the allowance by $500,000 to
$250,000 which, in light of the judgment against the Company and the settlement
offer proposed, represents a conservative estimate of the probable exposure.

47

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2.        On
May 9, 2001 an agreement was signed between the Company and Bank Hapoalim, Ltd.
with respect to the Companys debt to the Bank in the amount of $3,127,000. See
Item7 - Related Party
Transactions - Assignment of Bank Debt.

After the consummation of the Bank Agreement, the Company was informed
that the municipality of Hod Hasharon is delaying the payments due to the Bank.
As a consequence the Company is carrying out negotiations with the municipality
of Hod Hasharon for the repayment of the debt including interest accrued
thereon. The legal advisor of the Company in a letter dated June 6, 2002 wrote
that the present negotiations by the lawyers of the Company with the lawyers
representing the municipality of Hod Hasharon can be considered to be legal
procedures and that the guarantee can be considered extended under the Bank
agreement until November 30, 2002.

3.        On
December 4, 2001, Yossi Tessler and Lavni Krasni, shareholders in the Company
sent to Menachem Reinschmidt, CEO of the Company, a demand letter with claims
regarding information published by the Company regarding the BITmax Line of
Products, in the Proxy Statement filed in November 17, 2000.  Menachem has rejected these claims and the
so-called damages being claimed. As of the date of June 30, 2002, to the best
of the knowledge of the Company no action has been taken by the proposed
claimants. On September 14, 2001, by way of a Shareholders Meeting, Marnetics
Ltd.s shareholders approved a resolution to indemnify Menachem Reinschmidt in
respect to the demand letter sent by Advocate Yori Nehustan on behalf of Yossi
Tessler and Lavie Krasni, in accordance with the provisions and limitations set
out in the Companies Law 5759-1999.

4.          During
March 2003, the Company received letters from the lawyers of Marot Imaging
Israel Ltd., the Israeli representative of Getty Images, Inc. that pictures
from GETTYIMAGES were incorporated into the Companys internet site without
obtaining the copyright permission of the owner. The Company denied
responsibility for the alleged infringement, as the builder of the site
retained by the Company was responsible for the incorporation of the images
into the site. Upon notification that the images may be infringing
rights of third partys, the Company ceased to use the pictures in question and
has so notified the agent of Getty Images. Although Marot Imaging has offered
to settle the matter the Company at this time has decided not to accept the
settlement offer. To date no action has been filed with the courts by Marot in
this matter.

5.           During
year 2002, the Company resolved an issue with the Israel Airports Authority
regarding previous agreements made with the former CEO of the Company whereby
the Company had issued in the past a guarantee to provide electrical work to
the Israel Airports Authority.

On November 24, 1997 the Company under the
previous name Stav Electrical Systems(1994) Ltd signed an agreement to perform
services for the Israel Airports Authority and provided a guarantee to perform
the services under the agreement. On January 21, 2001 a further agreement was
signed regarding changes and additions to such services to be performed. The
Company, under its previous name, requested that Stav Lighting Manufacturer
Electric Services (Company no. 51-1108128) and Stav Electric Works Ltd.
(Company no. 51-1065880) perform the services and manage the work for the
Company.

On November 28, 2002 Stav Electric Works Ltd.
and Stav Lighting Manufacturer Electric Services joined with the Company,
jointly and severally, to perform the services for the Israel Airport
Authority, whereby the monies owing under the agreements with the Israel
Airports Authority will be paid to the Company.

On December 10, 2002, the Company and the
Israeli Airports Authority came to agreement regarding payment to the Company
for work provided by the previous companies involved in the previous
agreements, upon the Company committing to renew the guarantee by March 2,
2003. Since then the guarantee has been cancelled.

6.        The
Company received a bill for legal services from the legal offices of Holland
and Knight for previous work of approximately $30,000. The Company questioned
certain items on the bill and asked the internal auditor of the Company to
review the bill. Several of the invoices reviewed included excessive hours
billed. The internal auditor in a letter dated March 18, 2003 to the Audit
Committee of the Company believes that many of the hours charged are
unreasonable and that there were significant over-billings. As such the Company
has expanded its review of the Holland and Knight invoices, both current and
prior in order to determine the extent of the over billings. In the meanwhile,
Holland and Knight has demanded payment for such services which the Company has
not paid to date.

48

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Dividend Policy

Although in 1999 we declared a cash dividend
on our Ordinary Shares, we do not anticipate declaring a dividend for the
foreseeable future.  In addition, the
payment of cash dividends in the future (if ever declared by the Board) is
limited by the Israeli law to the profits of the Company and could potentially
be limited or prohibited by the terms of financing agreements we may enter into
(e.g.,
a bank line of credit or an agreement relating to the issuance of debt
securities of the Company). Marnetics has never paid any cash dividends to date
on its ordinary shares.

B.          Significant
Changes

The Companys operations during 2002
consisted of the core business of developing and marketing network capacity
enhancement and network information analysis solutions for IP networks or the
Network Business, which is handled through our wholly-owned subsidiary,
Marnetics Ltd. During 2002 the Company also dealt with some legal issues and
collection of debt relating to the Electrical
Business, which was sold during 2001.

Reduction
of Marnetics Business and Research and Development Activities

As of April 26, 2003, the Company decided to
lay off the majority of the employees of the Company and its wholly-owned
subsidiary, Marnetics Ltd. in the areas of marketing, sales and research and
development The remaining employees are in the area of administration and will
be left for the next few months, possibly to the end of the year 2003. A new
updated budget was approved that reflects the shut down of the research and
development, and marketing and sales operations of the Company and Marnetics
Ltd.  The Company asked the assistance
of several investment bankers and consultants to evaluate, Marnetics Ltd., in
order to assist the Board of Directors regarding the possible sale of Marnetics
Ltd. or its technology. There is no guarantee the Company will find a buyer for
Marnetics Ltd. or its technology.

Delisting of
Trading of Shares from the Amex

On February 2, 2003 the
AMEX, notified the Company that the Company no longer complies with the
Exchanges continued listing standards and that therefore the Companys
Ordinary Shares are subject to being delisted from the Exchange. The Exchange
has also notified the Company of its intention to proceed with the filing of an
application with the Securities and Exchange Commission (the SEC) to strike
the Companys Ordinary Shares from listing and registration on the Exchange.
The notice stated that the Companys Ordinary Shares are subject to delisting
due to falling below Section 1003(b)(i)(C) of the Guide, in that the Companys
aggregate market value of shares publicly held is less than $1,000,000 for more
than 90 consecutive days, as well as the substantial period of time at which
the Companys Ordinary Shares have been selling for a low price per share
(Section 1003(f)(v)).

On February 9, 2003,
the Company submitted a request for an oral hearing before a committee of the
Exchange in order to appeal the Exchanges above determination.

On March 27, 2003 the AMEX, notified the
Company of the decision of the Exchanges Listing Qualification Panel (the
Panel), which considered a request for review by the Company of the AMEX
staffs determination to prohibit the continued listing of the Companys
ordinary shares on the Exchange and initiate delisting proceedings due to the
Company not meeting the market value standard set forth in Section
1003(b)(i)(C) of the Guide, in that the Companys aggregate market value of
shares publicly held is less than $1,000,000 for more than 90 consecutive days,
as well as the substantial period of time at which the Companys Ordinary
Shares have been selling for a low price per share (Section 1003(f)(v) of the
Guide).

Upon its review, at the request of the
Company, the Panel has agreed with the determination of the Amex Staff that the
Companys ordinary shares should be delisted by the Exchange.

49

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The Amex has notified the Company that
pursuant to Section 1204(d) of the Guide, the Exchange will suspend trading in
the Companys ordinary shares as soon as practicable, and will proceed with the
filing of an application with the SEC to strike the Companys ordinary shares
from listing and registration on the Exchange when and if authorized, in
accordance with Sections 1205(g), 1206(d) and/or Section 1206(e) of the Guide.

The Company may request that the Committee on
Securities review the decision of the Panel; however, such a request for review
will not operate as a stay of the Panels decision. Due to the Companys
assessment of the likelihood of reversing the decision of the Panel, as well as
the costs involved, the Company has chosen not to request a review by the
Committee on Securities.

Marnetics Broadband Technologies Ltd.
recently started trading on the Pink Sheets, which are substantially less liquid and efficient, under the
symbol MXBT.PK See Item
9B  Listing  Markets.

Sale of Electrical Business

Effective
March 2001 (executed June 10, 2001) the Company sold to Idan Millenium
Investments and Assets Ltd. (IDAN), a company under the control of Dov
Strikovsky, a major shareholder
and President, Chairman and former CEO of the Company, all the fixed assets, inventories, other assets
and liabilities and related goodwill, in the amount of an appraised value of
$2,000,000, relating to the electrical operations for a consideration of
$597,000. The consideration is payable in 25 monthly installments of $24,000
commencing February 1, 2002. In May 2002 the Company signed an addendum with
IDAN to change the terms of payments to such that the first 11 installment will
be reduced to $7,000 each and the remaining 14 installments will be of $37,000.
The Company, considering the collectibility probability, decided to establish
an allowance on the amount not yet collected. During 2002 Mr. Strikovsky repaid
$71,000 on the account of the sale consideration. See Item 7B  Related Party
Transactions.

This summary highlights
selected information about the Electrical Business purchase agreement and may
not contain all of the information that is important to you.  To understand the sale of the Electrical
Business more fully and for a more complete description of the legal terms, you
should read Item 7B  Related Transactions, and the agreements,
which are attached as Exhibits 10.6 and 10.7 hereto and the other documents
referred to herein.

The Companys operations during 2001
consisted of two lines of business:  (1)
core business of developing and marketing broadband Internet fortification
solutions which shifted to the development and marketing of capacity
enhancement and information analysis solutions for IP networks  or the Network Business, which is handled
through our wholly-owned subsidiary, Marnetics Ltd., and (2) historical
business of electrical and lighting contracting and engineering business or the
Electrical Business, which was sold
during 2001.

During the year
2001, due to the shift of the technology focus of Marnetics, a new CEO was
brought into the Company. Menachem Reinschmidt established Marnetics in 1998 and was its first Chief Executive
Officer, and oversees all technology development activities of the
Company.  One of the leading data
communication experts in Israel, Mr. Reinschmidt has 17 years of
experience in the most advanced fields of computer networks, including design,
analysis, integration and development. 
His expertise incorporates advanced networking topics, including frame
relay, TCP/IP, Internet architecture, ATM, Local Area Networks, routers and
switches, and voice-over IP.

50

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Item
9.              The
Listing

A.           Listing
Details

The following are the
high and low sales prices by fiscal quarter for the quarterly periods in which
the Ordinary Shares have been traded on the AMEX.

|     |                                            | Ordinary Shares
  Trading Prices | 
|---- | ------------------------------------------ | -------------------------------- | 
|     |                                            |                                  | 
|     |                                            | High                             | 
|     |                                            |                                  | 
|1998 |                                            |                                  | 
|     | Fourth
  Quarter (from November, 25, 1998) |                                  | 
|1999 |                                            |                                  | 
|     | First
  Quarter                            |                                  | 
|     | Second
  Quarter                           |                                  | 
|     | Third
  Quarter                            |                                  | 
|     | Fourth
  Quarter                           |                                  | 
|2000 |                                            |                                  | 
|     | First
  Quarter                            |                                  | 
|     | Second
  Quarter                           |                                  | 
|     | Third
  Quarter                            |                                  | 
|     | Fourth
  Quarter                           |                                  | 
|2001 |                                            |                                  | 
|     | First
  Quarter                            |                                  | 
|     | Second
  Quarter                           |                                  | 
|     | Third
  Quarter                            |                                  | 
|     | Fourth
  Quarter                           |                                  | 
|2002 |                                            |                                  | 
|     | First
  Quarter                            |                                  | 
|     | Second
  Quarter                           |                                  | 
|     | Third
  Quarter                            |                                  | 
|     | Fourth
  Quarter                           |                                  | 
|2003 |                                            |                                  | 
|     | First Quarter                              |                                  | 
|     | Second
  Quarter                           |                                  | 

B.          Markets

On February 2, 2003 the
AMEX, notified the Company that the Company no longer complies with the Exchanges
continued listing standards and that therefore the Companys Ordinary Shares
are subject to being delisted from the Exchange. The Exchange has also notified
the Company of its intention to proceed with the filing of an application with
the Securities and Exchange Commission (the SEC) to strike the Companys
Ordinary Shares from listing and registration on the Exchange. The notice
stated that the Companys Ordinary Shares are subject to delisting due to
falling below Section 1003(b)(i)(C) of the Guide, in that the Companys
aggregate market value of shares publicly held is less than $1,000,000 for more
than 90 consecutive days, as well as the substantial period of time at which
the Companys Ordinary Shares have been selling for a low price per share
(Section 1003(f)(v)).

On February 9, 2003,
the Company submitted a request for an oral hearing before a committee of the
Exchange in order to appeal the Exchanges above determination.

On March 27, 2003 the AMEX, notified the
Company of the decision of the Exchanges Listing Qualification Panel (the
Panel), which considered a request for review by the Company of the AMEX
staffs determination to prohibit the continued listing of the Companys ordinary
shares on the Exchange and initiate delisting proceedings due to the Company
not meeting the market value standard set forth in Section 1003(b)(i)(C) of the
Guide, in that the Companys aggregate market value of shares publicly held is
less than $1,000,000 for more than 90 consecutive days, as well as the
substantial period of time at which the Companys Ordinary Shares have been
selling for a low price per share (Section 1003(f)(v) of the Guide).

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Upon its review, at the request of the
Company, the Panel has agreed with the determination of the Amex Staff that the
Companys ordinary shares should be delisted by the Exchange.

The Amex has notified the Company that
pursuant to Section 1204(d) of the Guide, the Exchange will suspend trading in
the Companys ordinary shares as soon as practicable, and will proceed with the
filing of an application with the SEC to strike the Companys ordinary shares
from listing and registration on the Exchange when and if authorized, in
accordance with Sections 1205(g), 1206(d) and/or Section 1206(e) of the Guide.

The Company may request that the Committee on
Securities review the decision of the Panel; however, such a request for review
will not operate as a stay of the Panels decision. Due to the Companys
assessment of the likelihood of reversing the decision of the Panel, as well as
the costs involved, the Company has chosen not to request a review by the
Committee on Securities.

Marnetics Broadband Technologies Ltd.
recently quoted on the Pink Sheets, which are substantially less liquid and efficient, under the
symbol MXBT.PK

C.           Plan
of Distribution

Not applicable.

D.           Selling
Shareholders

Not applicable.

E.            Dilution

Not applicable.

F.            Expenses
of the Issue

Not applicable.

Item
10.            Additional
Information

A.           Share
Capital

Not applicable.

B.           Memorandum
and Articles of Association

Marnetics Broadband Technologies Ltd. is an
Israeli company registered with the Israel Registrar of Companies, registration
no. 520004389-4.

On November 26, 2002, at the annual general
meeting of shareholders, the shareholders of the Company amended Article 99 of
the Articles of Association of the Company to provide to the fullest extent
allowed under Israeli Companies Law a change of language to provide provisions
which endeavor to limit personal liability of an office holder towards the
Company and shareholders regarding insurance coverage, indemnification and
exemption from duty of care. This amendment to the Articles of Association is
included as an exhibit as revised articles of association to this annual report
on Form 20-F. SeeItem
19  Exhibits.

Purposes and
Objects of the Company

Pursuant to Section 3 of our Articles of
Association, the Companys purpose is to operate according to business
considerations for the production of profits.

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Powers of
the Directors

The Directors shall formulate the Companys
policy and shall supervise the exercise of the General Managers office and his
acts, including, but not limited to the determination of the Companys plans of
activity, the principles for financing such plans and the organizational
structure of the Company.

The power of our directors to vote on a
proposal, arrangement or contract in which the director is materially
interested is limited by the relevant provisions of the Companies Law.

Rights
Attached to Shares

Our registered share capital consists of a
single class of 25,000,000 Ordinary Shares, par value NIS 0.08 per share, of
which 7,362,390 Ordinary Shares
were issued and outstanding as of June 2003. 
All outstanding Ordinary Shares are validly issued, fully paid and
non-assessable. The rights attached to the Ordinary Shares are as follows:

Dividend Rights

Subject to the permitted distribution
provisions of the Companies Law, the Board of Directors may declare a dividend
to be paid to the shareholders according to their rights and interests in the
profits, and may fix the record date for eligibility and the time for payment.

Subject to any preferential, deferred,
qualified or other rights, privileges or conditions attached to any special
class of shares with regard to dividends, the profits of the Company available
for dividend and resolved to be distributed shall be applied in payment of
dividends upon the shares of the Company in proportion to the amount paid up or
credited as paid up per the nominal value thereon respectively.

The Board of Directors may from time to time
pay to the shareholders on account of the next forthcoming dividend such
interim dividends as, in their judgment, the position of the Company justifies.

Voting Rights

Holders of our Ordinary Shares have one vote
for each ordinary share held on all matters submitted to a vote of
shareholders.  Such voting rights may be
affected by the grant of any special voting rights to the holders of a class of
shares with preferential rights that may be authorized in the future.  The quorum required for any meeting of
shareholders consists of at least two shareholders present in person or by
proxy who hold or represent, in the aggregate, at least one third of the voting
rights of the issued share capital. In the event that a quorum is not present
within fifteen minutes of the scheduled time, the shareholders meeting will be
adjourned to the same day in the following week, or such time and place as the
board of directors may determine. If at such reconvened meeting a quorum is not
present within half an hour from the time appointed for holding the meeting,
any two shareholders present in person or by proxy will constitute a quorum.

Notwithstanding the aforesaid, if a General
Meeting was convened at the demand of shareholders as permitted by Section
63(b) of the Companies Law, then a quorum at such adjourned meeting shall be
present only if one or more shareholders are present who held in the aggregate
at least 5% of the issued share capital of the Company and at least 1% of the
voting rights in the Company or one or more shareholders who hold in the
aggregate at least 5% of the voting rights in the Company.

Subject to the Companies Law, except
decisions regarding the amendment of Article 101 of our Articles Association
and/or the approval of transactions with interested parties (as listed in our
Articles of Associations), any resolution at a General Meeting shall be deemed
adopted if approved by the holders of a majority of the voting rights in the
Company represented at the meeting in person or by proxy and voting thereon.

The Directors of the Company are appointed by
the Annual General Meeting, unless appointed by the Board to fill a vacancy,
and shall serve as Directors from the time of appointment until the next Annual
General Meeting, unless such Director is disqualified for whatever reason.

53

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Rights in the Event of
Liquidation

If the Company shall be liquidated, whether
voluntarily or otherwise, the liquidators may, subject to the provision of the
Statutes, divide among the shareholders any part of the assets of the Company
and may vest any part of the assets of the Company in trustees upon such
trusts, for the benefit of the shareholders, as the liquidators deem
appropriate.

Changing
Rights Attached to Shares

If, at any time, the share capital is divided
into different classes of shares, the rights attached to any class may be
varied with the sanction of a majority vote at a meeting of the shareholders
passed at a separate meeting of the holders of the shares of the class.

General
Meetings

An Annual General Meeting shall be held at
least once in every calendar year at such time, not being more than fifteen
months after the holding of the last preceding Annual General Meeting, and at
such time and place as may be determined by the Board of Directors.  Such Annual General Meetings shall be called
Annual Meetings, and all other Meetings of the shareholders shall be called
Extraordinary Meetings.  The Annual Meeting
shall receive and consider the Directors Report, the Financial Statements,
appoint auditors, elect Directors, and transact any other business which, under
these Articles or by the Companies Law, may be transacted at a General Meeting
of the Company, provided that notice of such other business was given to
shareholders in accordance with the provisions of the Articles.

At least twenty-one (21) days and not more
than sixty (60)days notice of any General Meeting shall be given, specifying
the place, the day and the hour of meeting and, in the case of special
business, the nature of such business, shall be given in the manner hereinafter
mentioned, to such shareholders as are under the provisions of the Articles,
entitled to receive notices from the Company.

An Extraordinary Meeting may be convened by
the Board of Directors, whenever they think fit or upon a demand in writing by
members holding at least 10% of our issued capital.

Limitations on Foreign Shareholders to Hold or Exercise
Voting Rights

There are no limitations on foreign
shareholders in our articles of association. Israeli law restricts the ability
of citizens of countries that are in a state of war with Israel to hold shares
of Israeli companies.

Approval
of Transactions under Israeli Law

The Companies Law imposes fiduciary duties
that office holders, including directors and executive officers, owe to their
company. An office holders fiduciary duties consist of a duty of care and a
duty of loyalty. The duty of care generally requires an office holder to act
with the level of care which a reasonable office holder in the same position
would have acted under the same circumstances. The duty of loyalty generally
requires an office holder to act in good faith and for the good of the company.
Specifically, an office holder must avoid any conflict of interest between the
office holders position in the company and his or her other positions or
personal affairs. In addition, an office holder must avoid competing against
the company or exploiting any business opportunity of the company for his or
her own benefit or the benefit of others. An office holder must also disclose
to the company any information or documents relating to the companys affairs
that the office holder has received due to his or her position in the company.
The term office holder includes any person who, either formally or in
substance, serves as a director, general manager or chief executive officer, or
who reports directly to the general manager or chief executive officer. Each
person listed in the table under Item 6. Directors, Senior Managers and
EmployeesA. Directors and Senior Management above is an office holder of
the Company.

Under the Companies Law, all arrangements as
to compensation of office holders who are not directors require approval of the
board of directors and, in certain cases, the prior approval of the audit
committee. Arrangements as to compensation of directors also require audit
committee and shareholder approval.

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The Companies Law requires that an office
holder promptly disclose any personal interest that he or she may have, and all
related material information known to him or her, in connection with any
existing or proposed transaction by the company. A personal interest of an
office holder includes a personal interest of the office holders relative or a
corporation in which the office holder or the office holders relative is a 5%
or greater shareholder, director or general manager or has the right to appoint
at least one director or the general manager. The office holders duty to
disclose shall not apply in the event that the personal interest only results
from a personal interest of the office holders relative in a transaction that
is not an extraordinary transaction. An extraordinary transaction is a
transaction not in the ordinary course of business, not on market terms, or
likely to have a material impact on the companys profitability, assets or
liabilities.

Under the Companies Law, once the office
holder complies with the above disclosure requirement, the board of directors
is authorized to approve the transaction, unless the articles of association
provide otherwise. A transaction that is adverse to the companys interest may
not be approved. If the transaction is an extraordinary transaction, then it
also must be approved by the companys audit committee and board of directors,
and, under certain circumstances, by the shareholders of the company.
Generally, when an extraordinary transaction is considered by the audit
committee and board of directors, the interested directors may not be present
or vote.

Duties of
Shareholders

Under the Companies Law, the disclosure
requirements that apply to an office holder also apply to a controlling
shareholder of a public company. A controlling shareholder is a shareholder who
has the ability to direct the activities of a company, including a shareholder
that owns 25% or more of the voting rights if no other shareholder owns more
than 50% of the voting rights, but excluding a shareholder whose power derives
solely from his or her position on the board of directors or any other position
with the company. Extraordinary transactions with a controlling shareholder or
in which a controlling shareholder has a personal interest, and the engagement
of a controlling shareholder as an office holder or employee, generally require
the approval of the audit committee, the board of directors and the
shareholders. The shareholder approval must include at least one-third of the
shares of non-interested shareholders voted on the matter. However, the
transaction can be approved by shareholders without this one-third approval if
the total shares of non-interested shareholders voted against the transaction
do not represent more than one percent of the voting rights in the company.

In addition, under the Companies Law, each
shareholder has a duty to act in good faith toward the company and other
shareholders and to refrain from abusing his or her power in the company, such
as in shareholder votes. In addition, specified shareholders have a duty of
fairness toward the company. These shareholders include any controlling
shareholder, any shareholder who knows that it possesses the power to determine
the outcome of a shareholder vote and any shareholder who, pursuant to the
provisions of the articles of association, has the power to appoint an office
holder or any other power with respect to the company. However, the Companies
Law does not define the substance of this duty of fairness.

Increase
in Our Capital

The Company may from time to time by a
majority vote at a meeting of shareholders, whether all the shares for the time
being authorized shall have been issued or all the shares for the time being
issued shall have been fully called up or not, increase its share capital by
the creation of new shares.

C.           Material
Contracts

(i) Services agreement with Netlogic Ltd., a
company under the control of Mr. Menachem Reinschmidt, Director and Chairman of
the Company effective December 2, 2001, dated February 11, 2002, and (ii) an
Addendum to the Services agreement dated December 2, 2002 until June 2, 2003,
and a Second Addendum to the Services agreement from June 3, 2003 to December
2, 2002. See Item 7B - Major
Shareholders and Related Party Transactions  Related Party Transactions.

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Amendment to the asset purchase agreement
dated as of June 10, 2001 (Effective March 31, 2001) between the Company and
Idan Millennium Investments and Assetsdated as of May 6, 2002.  See Item 8B  Significant Changes  Sale of Electrical Business.

Speedwise entered into an agreement to sell
all its assets and intellectual property to Orsus Solutions Ltd., (Orsus) an
Israeli technology company, dated October 2002. Based on the consideration
received by Speedwise, the Company assesses that the recoverable amount of its
holdings in Speedwise will be $60,000 and as a result an impairment charge of
$522,000 has been recorded in the attached Item 18 - Consolidated Financial Statements December 31,
2002. See also Item 7B - Major Shareholders and Related Party Transactions  Related
Party Transactions.

InterCompany Loan Agreement between the
Company and Marnetics where as Marnetics Ltd will grant the Company a loan of
up to $500,000 dated September 2002. See Item 7B - Major Shareholders and Related Party Transactions  Related
Party Transactions.

In March 2002, Marnetics signed a
distribution agreement with Magalcom Communications & Computers Ltd. to
become a nonexclusive distributor of Marnetics products in Israel. The
agreement has terminated during June 2003. See Item 4.B. - Information on the Company  Business
Overview - Marketing, Promotional and Consultants.

In April 2002, Marnetics signed a
distribution agreement with TNN Networks Ltd. to become a nonexclusive
distributor of Marnetics products in Israel. The agreement has terminated
during June 2003. See Item
4.B. - Information on the Company  Business Overview - Marketing, Promotional
and Consultants

D.          Currency
Exchange Controls

Since January 1, 2003, all exchange control
restrictions imposed by the State of Israel have been removed, although there
are still reporting requirements for foreign currency transactions. However,
legislation remains in effect pursuant to which currency controls can be
imposed by administrative action at any time. Nonresidents of Israel who
purchase our ordinary shares are able to receive any dividends thereon (and any
amounts payable upon the dissolution, liquidation and winding up of our
affairs) freely repatriable in non-Israeli currency, provided that Israeli
income tax has been paid or withheld on such amounts. See Item 10.E. Additional Information -
Taxation - Taxation of Non-Resident Shareholders.

Non-residents of Israel may freely hold and
trade our ordinary shares, and the proceeds of sale thereof are not subject to
Israeli currency control restrictions. Neither our Memorandum of Association,
Articles of Association nor the laws of the State of Israel restrict in any way
the ownership or voting of shares by non-residents, except with respect to
subjects of countries that in a state of war with Israel.Taxation

The following is a summary of the material
Israeli and United States tax consequences, Israeli foreign exchange
regulations and certain Israeli government programs affecting us. To the extent
that the discussion is based on new tax or other legislation that has not been
subject to judicial or administrative interpretation, there can be no assurance
that the views expressed in the discussion will be accepted by the tax or other
authorities in question. The discussion is not intended, and should not be
construed, as legal or professional tax advice, is not exhaustive of all
possible tax considerations and should not be relied upon for tax planning
purposes.

Tax Reform in Israel

On January 1, 2003 a comprehensive tax reform
took effect in Israel. Pursuant to the reform, resident companies are subject
to Israeli tax on income accrued or derived in Israel or abroad. In addition,
the concept of controlled foreign corporation was introduced according to
which an Israeli company may become subject to Israeli taxes on certain income
of a non-Israeli subsidiary if the subsidiarys primary source of income is
passive income (such as interest, dividends, royalties, rental income or
capital gains). The tax reform also substantially changed the system of
taxation of capital gains.

56

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General Corporate Tax
Structure

Israeli companies are generally subject to
corporate tax at the rate of 36% of their taxable income. However in our case,
the rate is currently effectively reduced, as described below.

Special Provisions Relating
to Measurement of Taxable Income

The Income Tax Law (Inflationary
Adjustments), 1985, generally referred to as the Inflationary Adjustments
Law, represents an attempt to overcome the problems presented to a traditional
tax system by an economy undergoing rapid inflation. The Inflationary Adjustments
Law is highly complex. The material aspects to us can be described as follows:

There is a special tax adjustment for the
preservation of equity whereby certain corporate assets are classified broadly
into fixed, inflation resistant, assets and non-fixed (soft) assets. Where a
companys equity, as defined in law, exceeds the depreciated cost of fixed
assets, a deduction from taxable income that takes into account the effect of
the applicable annual rate of inflation on such excess is allowed, up to a
ceiling of 70% of taxable income in any single tax year, with the unused
portion permitted to be carried forward on a linked basis. If the depreciated
cost of fixed assets exceeds a companys equity, then such excess multiplied by
the applicable annual rate of inflation is added to taxable income.

Subject to certain limitations, depreciation
deductions on fixed assets and losses carried forward are adjusted for
inflation based on the increase in the Israeli consumer price index (CPI).

Capital Gains Tax Applicable
to Resident and Non-Resident Shareholders

Israeli law generally imposes a capital gains
tax on the sale of capital assets located in Israel, including shares in
Israeli resident companies, by both residents and non-residents of Israel,
unless a specific exemption is available or unless a treaty between Israel and
the country of the non-resident provides otherwise. Regulations promulgated
under the Israeli Income Tax Ordinance provided for an exemption from Israeli
capital gains tax for gains accrued before January 1, 2003 and derived from the
sale of shares of industrial companies that are traded on specified
non-Israeli markets, including The Nasdaq National Market, provided that the
sellers purchased their shares either in the companys initial public offering
or in public market transactions thereafter. This exemption does not apply to
shareholders who are in the business of trading securities, or to shareholders
that are Israeli resident companies subject to the Income Tax (Adjustments for
Inflation) Law- 1985.

On January 1, 2003, the Law for Amendment of
the Income Tax Ordinance (Amendment No.132), 5762-2002, known as the tax reform,
came into effect thus imposing capital gains tax at a rate of 15% on gains
derived on or after January 1, 2003 from the sale of shares in Israeli
companies publicly traded on a recognized stock exchange outside of Israel.
This tax rate does not apply to: (1) dealers in securities; (2) shareholders
that report in accordance with the Income Tax Law (Inflationary Adjustment) -
1985; or (3) shareholders who acquired their shares prior to an initial public
offering. The tax basis of shares acquired prior to January 1, 2003 will be
determined in accordance with the average closing share price in the three
trading days preceding January 1, 2003. Non-Israeli residents shall be exempt
from Israeli capital gains tax on any gains derived from the sale of shares publicly
traded on a stock exchange recognized by the Israeli Ministry of Finance
provided such shareholders did not acquire their shares prior to an initial
public offering. Notwithstanding the foregoing, dealers in securities in Israel
are taxed at regular tax rates applicable to business income. In any event, the
provisions of the tax reform shall not affect the exemption from capital gains
tax for gains accrued before January 1, 2003, as described in the previous
paragraph.

57

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In addition, pursuant to the Convention
Between the Government of the United States of America and the Government of
Israel with Respect to Taxes on Income, as amended (the United States- Israel
Tax Treaty), the sale, exchange or disposition of ordinary shares by a person
who qualifies as a resident of the United States within the meaning of the
United States-Israel Tax Treaty and who is entitled to claim the benefits
afforded to such person by the United States- Israel Tax Treaty  (a
Treaty United States Resident) generally will not be subject to the Israeli
capital gains tax unless such Treaty United States Resident holds, directly or
indirectly, shares representing 10% or more of our voting power during any part
of the 12- month period preceding such sale, exchange or disposition, subject
to certain conditions. A sale, exchange or disposition of ordinary shares by a
Treaty United States Resident who holds, directly or indirectly, shares
representing 10% or more of our voting power at any time during such preceding
12-month period would be subject to such Israeli tax, to the extent applicable;
however, under the United States-Israel Tax Treaty, such Treaty United States
Resident would be permitted to claim a credit for such taxes against the United
States federal income tax imposed with respect to such sale, exchange or
disposition, subject to the limitations in United States laws applicable to
foreign tax credits. The United States-Israel Tax Treaty does not relate to
United States state or local taxes.

Taxation of Non-Resident
Shareholders

Non-residents of Israel are subject to
Israeli income tax on income accrued or derived from sources in Israel,
including passive income such as dividends, royalties and interest. On
distributions of dividends, other than bonus shares and stock dividends, income
tax at the rate of 25% (12.5% for dividends not generated by an approved
enterprise if the non-resident is a United States corporation and holds 10% or
more of our voting power throughout a certain period, and 15% for dividends
generated by an approved enterprise) is withheld at the source, unless a
different rate is provided in a treaty between Israel and the shareholders
country of residence. Under the United States- Israel Tax Treaty, the maximum
tax on dividends paid to a holder of ordinary shares who is a Treaty United
States Resident will be 25%, however, under the Investment Law, dividends
generated by an approved enterprise are taxed at the rate of 15%.

Under a recent amendment to the Inflationary
Adjustments Law, non-Israeli corporations might be subject to Israeli taxes on
the sale of traded securities in an Israeli company, subject to the provisions
of any applicable double taxation treaty.

Foreign Exchange Regulations

Dividends, if any, paid to the holders of the
ordinary shares, and any amounts payable upon dissolution, liquidation or
winding up, as well as the proceeds of any sale in Israel of the ordinary
shares to an Israeli resident, may be paid in non-Israeli currency or, if paid
in Israeli currency, may be converted into freely repatriable dollars at the
rate of exchange prevailing at the time of conversion.

United States Federal Income
Taxes

The following summary sets forth the material
United States federal income tax consequences applicable to the following
persons who purchase, hold or dispose of ordinary shares (U.S. Shareholders):
(i) citizens or residents (as defined for United States federal income tax
purposes) of the United States; (ii) corporations or other entities taxable as
corporations created or organized in or under the laws of the United States or
any state thereof; (iii) estates, the income of which is subject to United
States federal income taxation regardless of its source; and (iv) trusts, if
(a) a United States court is able to exercise primary supervision over its
administration, and (b) one or more United States persons have the authority to
control all its substantial decisions. This discussion is based on the
provisions of the Internal Revenue Code of 1986, as amended (the Code),
United States Treasury Regulations promulgated there under and administrative
and judicial interpretations thereof, all as in effect as of the date of this
Annual Report on Form 20-F. This discussion generally applies only to U.S.
Shareholders that will hold the ordinary shares as capital assets and does not
consider (a) all aspects of U.S. federal income taxation that may be relevant
to particular U.S. Shareholders by reason of their particular circumstances
(including potential application of the alternative minimum tax), (b) special
treatment under the United States federal income tax laws applicable to such
persons as financial institutions, insurance companies, broker-dealers,
tax-exempt organizations and foreign individuals or entities, (c) the special
rules applicable to U.S. Shareholders owning, directly or by attribution, 10%
or more of our outstanding voting shares, (d) the special rules applicable to
U.S. Shareholders who hold the ordinary shares as part of a hedging, straddle
or conversion transaction, (e) the special rules applicable to U.S.
Shareholders who acquire ordinary shares in a compensatory transaction, (f) the
special rules applicable to U.S. Shareholders whose functional currency is not
the dollar, and (g) any aspect of state, local or non-United States tax law.
Accordingly, each investor should consult his or her own tax advisor as to the
particular tax consequences to him or her of an investment in ordinary shares,
including the effects of applicable state, local or foreign tax laws and
possible changes in the tax laws.

58

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Dividends Paid on Ordinary
Shares

A U.S. Shareholder generally will be required
to include in gross income as ordinary dividend income the amount of any
distributions in respect of ordinary shares (including the amount of any
Israeli taxes withheld there from) to the extent that such distributions are
paid out of our current or accumulated earnings and profits, as determined for
United States federal income tax purposes. Distributions in excess of such
earnings and profits will be treated first as a non-taxable return of capital
reducing the U.S. Shareholders tax basis in his, her or its ordinary shares to
the extent of the distributions, and then as capital gain from a deemed sale or
exchange of such ordinary shares. Such dividends generally will not qualify for
the dividends received deduction available to corporations. The amount of any
cash distribution in respect of ordinary shares paid in NIS will equal the
United States dollar value of the distribution, calculated by reference to the
exchange rate in effect on the date of the distribution.

Subject to certain conditions and
limitations, any Israeli tax withheld or paid with respect to dividends on the
ordinary shares will be eligible for credit against a U.S. Shareholders United
States federal income tax liability at such U.S. Shareholders election. The
Code provides limitations on the amount of foreign tax credits that a U.S.
Shareholder may claim, including extensive separate computation rules, under which
foreign tax credits allowable with respect to specific categories of income
cannot exceed the United States federal income taxes otherwise payable with
respect to each such category of income. U.S. Shareholders that do not elect to
claim a foreign tax credit may instead claim a deduction for Israeli income tax
withheld or paid, but only for a year in which these U.S. Shareholders elect to
do so for all foreign income taxes. Dividends with respect to the ordinary
shares generally will be classified as foreign-source passive income for the
purpose of computing a U.S. Shareholders foreign tax credit limitations for
United States foreign tax credit purposes. The rules relating to foreign tax
credits are complex and you should consult your tax advisor to determine
whether and if you would be entitled to this credit.

Disposition of Ordinary
Shares

The sale or exchange of ordinary shares
generally will result in the recognition of capital gain or loss in an amount
equal to the difference between the amount realized on the sale or exchange and
the U.S. Shareholders tax basis in the ordinary shares. Such gain or loss
generally will be long-term capital gain or loss if the U.S. Shareholders
holding period of the ordinary shares exceeds one year at the time of the
disposition. Gain or loss recognized by a U.S. Shareholder on a sale or
exchange of ordinary shares generally will be treated as United States-source
income or loss for United States foreign tax credit purposes. Under the tax
treaty between the United States and Israel, gain derived from the sale,
exchange or other disposition of ordinary shares by a holder who is a resident
of the United States for purposes of the treaty and who sells the ordinary
shares within Israel may be treated as foreign-source income for United States
foreign tax credit purposes.

Passive Foreign Investment
Company Status

Generally, a foreign corporation is treated
as a passive foreign investment company (PFIC) for United States federal
income tax purposes for any tax year if, in such tax year, either (i) 75% or
more of its gross income is passive in nature (the Income Test), or (ii) the
average percentage of its assets during such tax year which produce, or are
held for the production of, passive income (determined by averaging the
percentage of the fair market value of its total assets which are passive
assets as of the end of each quarter of such year) is 50% or more (the Asset Test).

59

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Because less than 75% of our gross income in
2002 and in prior years constituted passive income, as defined for purposes of
the Income Test, we do not believe that application of the Income Test would
have resulted in our classification as a PFIC for any of such years. In
addition, we do not believe that application of the Asset Test would have
resulted in our classification as a PFIC for any tax year prior to 2001. For
2001 and 2002, however, it is possible that we could be classified as a PFIC
under the Asset Test principally because a significant portion of our assets
continued to consist of the cash raised in connection with the two public
offerings of our ordinary shares in 1999, coupled with the decline in the public
market value of our ordinary shares during 2001 and 2002 and the timing of the
required valuations, although there is no definitive method prescribed in the
Code, United States Treasury Regulations or administrative or judicial
interpretations thereof for determining the value of a foreign corporations
assets for purposes of the Asset Test. While the legislative history of the
United States Taxpayer Relief Act of 1997 indicates that the total value of a
publicly-traded foreign corporations assets generally will be treated as equal
to the sum of the aggregate value of its outstanding stock plus its
liabilities, there remains substantial uncertainty regarding the valuation of
a publicly-traded foreign corporations assets for purposes of the Asset Test,
and it is arguable that under alternative valuation methodologies, the value of
our total assets as of the relevant valuation dates in 2001 and/or 2002 would
not result in our classification as a PFIC during either or both of such years.

In view of the uncertainty regarding the
valuation of our assets for purposes of the Asset Test and the complexity of
the issues regarding our treatment as a PFIC for 2001, 2002 and, quite
possibly, subsequent years, U.S. Shareholders are urged to consult their own
tax advisors for guidance as to our status as a PFIC. For those U.S.
Shareholders who determine that we were a PFIC for 2001, 2002 and/or any
subsequent years and notify us in writing of their request for the information
required in order to effectuate the QEF Election described below, we will
promptly make such information available to them.

If we are treated as a PFIC for United States
federal income tax purposes for any year during a U.S. Shareholders holding period
of ordinary shares and the U.S. Shareholder does not make a QEF Election or a
mark-to-market election (both as described below), any gain recognized by the
U.S. Shareholder upon the sale of ordinary shares (or the receipt of certain
distributions) would be treated as ordinary income. This income would be
allocated over the U.S. Shareholders holding period with respect to his
ordinary shares and an interest charge would be imposed on the amount of
deferred tax on the income allocated to prior taxable years.

Although we generally will be treated as a
PFIC as to any U.S. Shareholder if we are a PFIC for any year during the U.S.
Shareholders holding period, if we cease to satisfy the requirements for PFIC
classification, the U.S. Shareholder may avoid the consequences of PFIC
classification for subsequent years if he elects to recognize gain based on the
unrealized appreciation in the ordinary shares through the close of the tax
year in which we cease to be a PFIC. Additionally, if we are treated as a PFIC,
a U.S. Shareholder who acquires ordinary shares from a decedent would be denied
the normally available step-up in tax basis for these ordinary shares to fair
market value at the date of death and instead would have a tax basis equal to
the decedents tax basis in these ordinary shares.

A U.S. Shareholder who beneficially owns
shares of a PFIC must file Form 8621 (Return by a Shareholder of a Passive
Foreign Investment Company or Qualified Electing Fund) with the United States
Internal Revenue Service for each tax year in which he holds shares in a PFIC.
This form describes any distributions received with respect to these shares and
any gain realized upon the disposition of these shares.

For any tax year in which we are treated as a
PFIC, a U.S. Shareholder may elect to treat his, her or its ordinary shares as
an interest in a qualified electing fund (a QEF Election), in which case, the
U.S. Shareholder would be required to include in income currently his, her or
its proportionate share of our earnings and profits in years in which we are a
PFIC regardless of whether distributions of our earnings and profits are
actually distributed to the U.S. Shareholder. Any gain subsequently recognized
upon the sale by the U.S. Shareholder of his ordinary shares, however,
generally would be taxed as capital gain and the denial of the basis step-up at
death described above would not apply.

As an alternative to a QEF Election, a U.S.
Shareholder generally may elect to mark his ordinary shares to market annually,
recognizing ordinary income or loss (subject to certain limitations) equal to
the difference between the fair market value of his ordinary shares and the adjusted
tax basis of his ordinary shares. Losses would be allowed only to the extent of
net mark-to-market gain accrued under the election. If a mark-to-market
election with respect to ordinary shares is in effect on the date of a U.S.
Shareholders death, the normally available step-up in tax basis to fair market
value will not be available. Rather, the tax basis of the ordinary shares in
the hands of a U.S. Shareholder who acquired them from a decedent will be the
lesser of the decedents tax basis or the fair market value of the ordinary
shares.

60

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The implementation of many aspects of the
Codes PFIC rules requires the issuance of regulations which in many instances
have yet to be promulgated and which may have retroactive effect. We cannot be
sure that any of these regulations will be promulgated or, if so, what form
they will take or what effect they will have on the foregoing discussion.
Accordingly, and due to the complexity of the PFIC rules, U.S. Shareholders
should consult their own tax advisors regarding our status as a PFIC for 2001,
2002 and any subsequent years and the eligibility, manner and advisability of
making a QEF Election or a mark-to-market election if we are treated as a PFIC.

For information with respect to the
applicability of Israeli capital gains taxes on the sale of ordinary shares by
United States residents, see Capital Gains Tax Applicable to Resident and Non-Resident
Shareholders, above.

E.            Dividends
and Paying Agents

Not applicable.

F.            Statement
of Experts

Not applicable.

G.           Documents
on Display

The Company (formerly named Stav Electrical Systems (1994)
Ltd.) is subject to certain of the
informational requirements of the
Securities Exchange Act of 1934 and the rules and regulations promulgated there
under and in accordance therewith files reports, proxy statements and other
information with the Securities and Exchange Commission. Reports, proxy
statements and other information filed by the Company may be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N. W., Washington, D. C. 20549 and at the Regional Offices
thereof at 233 Broadway, New York, New York and at 175 West Jackson Boulevard,
Suite 900, Chicago, Illinois. Copies of such information can be obtained by
mail from the Public Reference Section of the Commission at 450 Fifth Street,
N. W., Washington, D. C. 20549 at prescribed rates.  In addition, beginning in July 2001 the Company began filing its
reports with the Commission electronically and any reports, proxy statements
and other information filed by the Company after such date may also be
inspected the Commissions web site at www.sec.gov.

You may request a copy of our U.S. Securities
and Exchange Commission filings, at no cost, by writing or calling us at
Marnetics Broadband Technologies Ltd., 10 Hayetzira Street, Raanana 43000,
Israel, Attention: Mr. Ilan Hadar, Chief Financial Officer, telephone: ++
972-9-7616868. A copy of each report submitted in accordance with applicable
United States law is available for public review at our principal executive
offices.

A copy of each document (or a translation
thereof to the extent not in English) concerning Marnetics Broadband
Technologies Ltd. that is referred to in this Annual Report on Form 20-F, is
available for public view at our principal executive offices at Marnetics
Broadband Technologies Ltd., 10 Hayetzira Street, Raanana 43000, Israel.

H.          Subsidiary
Information

Not Applicable.

Item 11.
           Quantitative and Qualitative Disclosures
about Market Risk

The Company is exposed to various market
risks, including but not limited to risks deriving from changes in interest
rates and inflation rates and changes in the exchange rate of the NIS against
foreign currencies.

61

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Interest Rate Risk.At December 31, 2002, the Company had cash
and cash equivalents in the aggregate amount of $957,000 deposited primarily in
major Israeli banks.  These amounts
accrue or bear nominal interest based on U.S. dollar interest rate and NIS
interest rate.

Foreign Currency Exchange Risks.At December 31, 2002, 92.3% of the cash and
cash equivalent were deposits denominated in NIS and linked to
the US dollar exchange rate. Only 7.7% of the Companys current assets
were cash deposits denominated in NIS in the aggregate amount of $76,000. These
amounts as presented in U.S. dollars may be affected by changes in the exchange
rate between NIS and the U.S. dollars.

Fair value of financial instruments. The financial instruments of the Company
consist mainly of cash and cash equivalents, current accounts receivable,
accounts payable and accruals. Due to the relatively short period to maturity,
the fair value of the financial instruments included in the working capital of
the Company approximates their carrying amounts.

Item
12.           Description of Securities Other than Equity
Securities

Not applicable.

PART II

Item
13.           Defaults,
Dividend Arrearage and Delinquencies

None.

Item
14.           Material
Modifications to the Rights of Security Holders and Use of Proceeds

None.

Item 15.        
  Controls and Procedures

(a)          We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our periodic filings with the SEC is
recorded, processed, summarized and reported within the time periods specified
in the SECs rules and forms relevant to our Company. Within 90 days prior to
the filing date of this Annual Report on Form 20-F, we have carried out an
evaluation, under the supervision and with the participation of our management,
including our active chairman of the board and chief financial officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based upon that evaluation, chief executive officer and chief
financial officer concluded that our disclosure controls and procedures are
effective in assuring that all material information relating to our Company is
made known to them.

(b)          There
have been no significant changes in our internal controls or in other factors,
which could significantly affect the internal controls subsequent to the date
of their evaluation in connection with the preparation of this Annual Report on
Form 20-F.

Item
16A.        Audit Committee Financial
Report

Reserved.

Item 16B.        Code
of Ethics.

Reserved.

PART III

Item
17.           Financial
Statements.

Not applicable.  The Company has elected to furnish financial
statements pursuant to Item 18 below.

62

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Item
18.           Financial
Statements.

The Consolidated Financial Statements and
related notes required by this item are found at the end of this Annual Report,
F-1 to F-19.

|INDEX TO CONSOLIDATED FINANCIAL STATEMENTS                                                                                                                                 |  | Page       
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------
|                                                                                                                                                                           |  |            
|Report
  of Independent Public Accountants                                                                                                                                 |  | F-2        
|Consolidated
  Balance Sheets as of December 31, 2002 and 2001                                                                                                             |  | F-3        
|Consolidated
  Statements of Operations or the years ended December 31, 2002, 2001, 
     and 2000 and for the cumulative period from June 1, 1998 to December 31,
  2002  |  | F-4        
|Statements
  of Changes in Shareholders Equity for the years ended December 31,
  2002,
  2001 and 2000                                                                   |  | F-5        
|Statements
  of Consolidated Cash Flows
     for the years ended December 31, 2002, 2001 and 2000 
   and for the cumulative period from June 1, 1998 to December 31, 2002 |  | F-6 to F-8 
|Notes
  to the Financial Statements                                                                                                                                        |  | F-9 to F-19



|Item 19. | EXHIBITS                                                                                                                                                                                                                                                                                                                                      
|-------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|         |                                                                                                                                                                                                                                                                                                                                               
|1.1      | Memorandum of Association
  of the Registrant (filed as Exhibit 3.1 to Form F-1 Registration Statement
  No. 333-8800 and by this reference incorporated herein).                                                                                                                                                                             
|         |                                                                                                                                                                                                                                                                                                                                               
|1.2      | Amended and Restated
  Articles of Associations of the Registrant (including revision for Amendment
  from November 26, 2002 reflected in amended wording to Article 99).                                                                                                                                                                     
|         |                                                                                                                                                                                                                                                                                                                                               
|4.1      | 2001 Share Option Plan
  (incorporated by reference to Exhibit 4.1 to the Companys Annual Report on
  Form 20-F for year ended December 31, 2000).                                                                                                                                                                                           
|         |                                                                                                                                                                                                                                                                                                                                               
|4.2      | Services agreement with
  Netlogic Ltd., a company under the control of Mr. Menachem Reinschmidt,
  Director and then Chief Executive Officer of the Company, effective December
  2, 2001, dated February 11, 2002 (incorporated by reference to Exhibit 4.2 to
  the Companys annual report on Form 20-F for year ended December 31, 2001).
|         |                                                                                                                                                                                                                                                                                                                                               
|4.3      | Addendum to services
  agreement with Netlogic Ltd., a company under the control of Mr. Menachem
  Reinschmidt, current Chairman of the Board of the Company, dated December 2,
  2002.                                                                                                                                                       
|         |                                                                                                                                                                                                                                                                                                                                               
|4.4      | Second addendum to
  services agreement with Netlogic Ltd., a company under the control of Mr.
  Menachem Reinschmidt, current Chairman of the Board of the Company dated June
  2, 2003.                                                                                                                                                     
|8        | List of subsidiaries
  (incorporated by reference to Item 4  Information on the Company 
  Organizational Structure in this Annual Report on Form 20-F).                                                                                                                                                                                  
|         |                                                                                                                                                                                                                                                                                                                                               
|10.1     | Form of officers and
  directors indemnification agreement (filed as Exhibit 10.3 to Form F-1 Registration
  Statement No. 333-8800 and by this reference incorporated herein).                                                                                                                                                             
|         |                                                                                                                                                                                                                                                                                                                                               
|10.2     | Loan agreement between
  Bank Hapoalim Ltd. and the Registrant (filed as Exhibit 10.4 to Form F-1
  Registration Statement No. 333-8800 and by this reference incorporated herein).                                                                                                                                                           
|         |                                                                                                                                                                                                                                                                                                                                               
|10.3     | Promissory Note issued by
  Dov Strikovsky, the former President, Chairman and CEO of the Company, to the
  Company (filed as Exhibit 10.5 to Form F-1 Registration Statement No.
  333-8800 and by this reference incorporated herein).                                                                                                      
|         |                                                                                                                                                                                                                                                                                                                                               
|10.4     | Share exchange agreement
  among Marnetics Ltd., its Shareholders and the Registrant dated as of May 31,
  2000, as amended (filed as Exhibit 10.6 to Form 20-F for the year-ended
  December 31, 2000 and by this reference incorporated herein)                                                                                             

63

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|      |                                                                                                                                                                                                                                                                                                                                
|----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.5  | Indemnification agreement
  between Dov Strikovsky, the former President, Chairman and CEO of the
  Company, the Company and the former shareholders of Marnetics Ltd. dated as
  of June 30, 2001 (incorporated by reference to Exhibit 10.5 to the Companys
  annual report on Form 20-F for year ended December 31,  2000).
|      |                                                                                                                                                                                                                                                                                                                                
|10.6  | Asset purchase agreement
  between the Company and Idan Millennium Investments and AssetsLtd.
  dated as of June 10, 2001 (incorporated by reference to Exhibit 10.7 to the
  Companys annual report on Form 20-F for year ended December 31, 2000)                                                                           
|      |                                                                                                                                                                                                                                                                                                                                
|10.7  | Amendment to the asset
  purchase agreement between the Company and Idan Millennium Investments and
  AssetsLtd. dated as of May 6, 2002
  ((incorporated by reference to Exhibit 10.7 to the Companys annual report on
  Form 20-F for year ended December 31, 2001).                                                        
|      |                                                                                                                                                                                                                                                                                                                                
|10.8  | Agreements to the
  assignment of debt by and among the Company, Bank Hapoalim Ltd. and Shlavor
  Systems Ltd. dated as of May 9, 2001 (incorporated by reference to
  Exhibit 10.9 to the Companys Annual Report on Form 20-F for year ended
  December 31,  2000).                                                          
|      |                                                                                                                                                                                                                                                                                                                                
|10.9  | Certification pursuant to
  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                     
|      |                                                                                                                                                                                                                                                                                                                                
|10.10 | Certification pursuant to
  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                     

64

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SIGNATURES

The
registrant hereby certifies that it meets all of the requirements for filing on
Form 20-F and that it has duly caused and authorized the undersigned to sign
this Annual Report on its behalf.

| | MARNETICS BROADBAND TECHNOLOGIES LTD.
| | -------------------------------------
| |                                      
| |                                      
| | By:                                  
| |                                      
| |                                      
| |                                      
| |                                      
| | By:                                  
| |                                      
| |                                      
| |                                      

Date:  June 29,
2003

65

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CERTIFICATION

I,
Menachem Reinschmidt, certify that:

|1. | I have reviewed this
  annual report on Form 20-F of Marnetics Broadband Technologies Ltd.;                                                                                                                                                                                                                                                                                                     
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                 
|2. | Based on my knowledge,
  this annual report does not contain any untrue statement of a material fact
  or omit to state a material fact necessary to make the statements made, in
  light of the circumstances under which such statements were made, not
  misleading with respect to the period covered by this annual report;                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                 
|3. | Based on my knowledge, the
  financial statements, and other financial information included in this annual
  report, fairly present in all material respects the financial condition,
  results of operations and cash flows of the registrant as of, and for, the
  periods presented in this annual report;                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                 
|4. | The registrants other
  certifying officers and I are responsible for establishing and maintaining
  disclosure controls and procedures (as defined in Exchange Act Rules 13a-14
  and 15d-14) for the registrant and we have:                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                 
|   | a.          designed such disclosure
  controls and procedures to ensure that 
  material information relating to the registrant, including its
  consolidated subsidiaries, is made known to us by others within those
  entities, particularly during the period in which this annual report is being
  prepared;                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                 
|   | b.          evaluated the
  effectiveness of the registrants disclosure controls and procedures as of a
  date within 90 days prior to the filing date of this annual report (the
  Evaluation Date); and                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                 
|   | c.          presented in this annual
  report our conclusions about the effectiveness of the disclosure controls and
  procedures based on our evaluation as of the Evaluation Date;                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                 
|5. | The registrants other
  certifying officers and I have disclosed, based on our most recent
  evaluation, to the registrants auditors and the audit committee of
  registrants board of directors (or persons performing the equivalent
  function):                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                 
|   | a.          all significant
  deficiencies in the design or operation of internal controls which could
  adversely affect the registrants ability to record, process, summarize and
  report financial data and have identified for the registrants auditors any
  material weaknesses in internal controls; and                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                 
|   | b.          any fraud, whether or not
  material, that involves management or other employees who have a significant
  role in the registrants internal controls; and                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                 
|6. | The registrants other
  certifying officers and I have indicated in this annual report whether or not
  there were significant changes in internal controls or in other factors that
  could significantly affect internal controls subsequent to the date of our
  most recent evaluation, including any corrective actions with regard to
  significant deficiencies and material weaknesses.

Date:
June 29, 2003

| | /s/ Menachem Reinschmidt                     
| | ---------------------------------------------
| |                                              
| | Menachem Reinschmidt,
  Chairman of the Board
| |                                              

66

---

---

CERTIFICATION

I,
Ilan Hadar, certify that:

|1. | I have reviewed this
  annual report on Form 20-F of Marnetics Broadband Technologies Ltd.;                                                                                                                                                                                                                                                                                                     
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                 
|2. | Based on my knowledge,
  this annual report does not contain any untrue statement of a material fact
  or omit to state a material fact necessary to make the statements made, in light
  of the circumstances under which such statements were made, not misleading
  with respect to the period covered by this annual report;                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                 
|3. | Based on my knowledge, the
  financial statements, and other financial information included in this annual
  report, fairly present in all material respects the financial condition,
  results of operations and cash flows of the registrant as of, and for, the
  periods presented in this annual report;                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                 
|4. | The registrants other
  certifying officers and I are responsible for establishing and maintaining
  disclosure controls and procedures (as defined in Exchange Act Rules 13a-14
  and 15d-14) for the registrant and we have:                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                 
|   | a.          designed such disclosure
  controls and procedures to ensure that 
  material information relating to the registrant, including its
  consolidated subsidiaries, is made known to us by others within those
  entities, particularly during the period in which this annual report is being
  prepared;                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                 
|   | b.          evaluated the
  effectiveness of the registrants disclosure controls and procedures as of a
  date within 90 days prior to the filing date of this annual report (the
  Evaluation Date); and                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                 
|   | c.          presented in this annual
  report our conclusions about the effectiveness of the disclosure controls and
  procedures based on our evaluation as of the Evaluation Date;                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                 
|5. | The registrants other
  certifying officers and I have disclosed, based on our most recent
  evaluation, to the registrants auditors and the audit committee of
  registrants board of directors (or persons performing the equivalent
  function):                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                 
|   | a.          all significant
  deficiencies in the design or operation of internal controls which could
  adversely affect the registrants ability to record, process, summarize and
  report financial data and have identified for the registrants auditors any
  material weaknesses in internal controls; and                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                 
|   | b.          any fraud, whether or not
  material, that involves management or other employees who have a significant
  role in the registrants internal controls; and                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                 
|6. | The registrants other
  certifying officers and I have indicated in this annual report whether or not
  there were significant changes in internal controls or in other factors that
  could significantly affect internal controls subsequent to the date of our
  most recent evaluation, including any corrective actions with regard to
  significant deficiencies and material weaknesses.

Date:
June 29, 2003

| | /s/ Ilan Hadar                       
| | -------------------------------------
| |                                      
| | Ilan
  Hadar, Chief Financial Officer
| |                                      

67

---

---

MARNETICS
BROADBAND TECHNOLOGIES LTD.
(A Development Stage Company)

CONSOLIDATED
FINANCIAL STATEMENTS

DECEMBER 31,
2002

---

---

MARNETICS BROADBAND TECHNOLOGIES LTD.

CONSOLIDATED
FINANCIAL STATEMENTS

CONTENTS

|                                         |                                                                                                                                                                           | Page
|---------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----
|                                         |                                                                                                                                                                           |     
|                                         |                                                                                                                                                                           |     
|Report of Independent Public Accountants | 2                                                                                                                                                                        
|                                         |                                                                                                                                                                           |     
|                                         | Consolidated Balance Sheets
    as at December 31, 2002 and 2001                                                                                                          | 3   
|                                         |                                                                                                                                                                           |     
|                                         | Consolidated Statements of Operations
    for the years ended December 31, 2002, 2001 and 2000
    and for the cumulative period from June 1, 1998 to
  December 31, 2002 | 4   
|                                         |                                                                                                                                                                           |     
|                                         | Statements of Changes in Shareholders Equity
    for the years ended December 31, 2002, 2001 and 2000                                                                    | 5   
|                                         |                                                                                                                                                                           |     
|                                         | Consolidated Statements of Cash Flows
    for the years ended December 31, 2002, 2001 and 2000
    and for the
  cumulative period from June 1, 1998 to December 31, 2002 | 6   
|                                         |                                                                                                                                                                           |     
|                                         | Notes to
  the Financial Statements                                                                                                                                       | 9   

---

---

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of Marnetics Broadband
Technologies Ltd.

We
have audited the accompanying consolidated balance sheets of Marnetics Broadband Technologies Ltd.
(the Company) (a development - stage company) as of
December 31, 2002 and 2001, and the related consolidated statements of
operations, shareholders equity and cash flows for the years ended December
31, 2002, 2001 and 2000 and the cumulative period from June 1, 1998 (date of
commencement of operations) to December 31, 2002. These consolidated financial
statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial statements
based on our audits.

We
conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by the Companys management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In
our opinion, the aforementioned consolidated financial statements present
fairly, in all material respects, the consolidated financial position of the
Company  (a development-stage company)
as of December 31, 2002 and 2001, and its consolidated results of operations
and its cash flows for the years ended December 31, 2002, 2001 and 2000 and the
cumulative period from June 1, 1998 (date of commencement of operations) to
December 31, 2002, in conformity with accounting principles generally accepted
in the United States of America.

The accompanying financial
statements have been prepared assuming that the Company will continue as a
going concern. As discussed in Note 1b to the financial statements, the
Companys recurring losses from operations raise substantial doubt about its
ability to continue as a going concern. Managements plans concerning these
matters are also described in Note 1b. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.

Brightman Almagor & Co.
Certified Public Accountants (Israel)
A member of Deloitte Touche Tohmatsu

Tel Aviv, Israel
May 13, 2003

- 2 -

---

---

MARNETICS BROADBAND TECHNOLOGIES LTD.
(A Development Stage Company)
(U.S$ in thousands)

CONSOLIDATED
BALANCE SHEETS

|                                                                                                                                                           |                             | December 31, |        
|---------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------- | ------------ | -------
|                                                                                                                                                           |                             |              |        
|                                                                                                                                                           |                             | 2 0 0 2      |        
|                                                                                                                                                           |                             |              |        
|Current assets:                                                                                                                                            |                             |              |        
|Cash and cash equivalents                                                                                                                                  |                             | $            | 957    
|Receivables:                                                                                                                                               |                             |              |        
|                                                                                                                                                           | Trade                       |              |        
|                                                                                                                                                           | Related parties (Note 3)    |              |        
|                                                                                                                                                           | Other (Note 6a)             |              |        
|                                                                                                                                                           |                             |              |        
|                                                                                                                                                           | Total
  current assets      |              |        
|                                                                                                                                                           |                             |              |        
|                                                                                                                                                           |                             |              |        
|Investment in affiliate (Note 4)                                                                                                                           |                             |              | 60     
|                                                                                                                                                           |                             |              |        
|Fixed assets (Notes 2e
  & 5)                                                                                                                              |                             |              |        
|Cost                                                                                                                                                       |                             |              | 287    
|Less - accumulated depreciation                                                                                                                            |                             |              | 134    
|                                                                                                                                                           |                             |              |        
|                                                                                                                                                           |                             |              | 153    
|                                                                                                                                                           |                             |              |        
|                                                                                                                                                           |                             |              |        
|                                                                                                                                                           |                             | $            | 1,485  
|                                                                                                                                                           |                             |              |        
|                                                                                                                                                           |                             |              |        
|Current
  liabilities:                                                                                                                                     |                             |              |        
|Short-term bank credit
  (Note 6b)                                                                                                                         |                             | $            | -      
|Payables:                                                                                                                                                  |                             |              |        
|                                                                                                                                                           | Trade                       |              |        
|                                                                                                                                                           | Other (Note 6c)             |              |        
|                                                                                                                                                           |                             |              |        
|                                                                                                                                                           | Total
  current liabilities |              |        
|                                                                                                                                                           |                             |              |        
|                                                                                                                                                           |                             |              |        
|                                                                                                                                                           |                             |              |        
|Accrued
  severance pay                                                                                                                                    |                             |              | 8      
|                                                                                                                                                           |                             |              |        
|Commitments
  and contingent liabilities (Note 7)                                                                                                          |                             |              |        
|Shareholders
  equity (Note 8)                                                                                                                            |                             |              |        
|Share capital:
  Ordinary shares of NIS 0.08 par value
  (Authorized, 25,000,000 shares, issued and outstanding at December
  31, 2002 and 2001 7,362,390) |                             |              | 130    
|Additional paid-in capital                                                                                                                                 |                             |              | 25,203 
|Deferred stock based
  compensation                                                                                                                        |                             |              | (792   
|Accumulated deficit                                                                                                                                        |                             |              | (24,333
|                                                                                                                                                           |                             |              |        
|                                                                                                                                                           |                             |              | 208    
|                                                                                                                                                           |                             |              |        
|                                                                                                                                                           |                             |              |        
|                                                                                                                                                           |                             | $            | 1,485  
|                                                                                                                                                           |                             |              |        
|                                                                                                                                                           |                             |              |        

The accompanying notes are an integral part
of the financial statements

- 3 -

---

---

MARNETICS BROADBAND TECHNOLOGIES LTD.
(A Development Stage Company)
(U.S$ in thousands, except share and per share data)CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                                                                                                                                                                                                      |  | Year ended December 31, |           | Cumulative from
  June 1, 1998
  (date of
  commencement of
  operations) to
  December 31, | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | --------- | ------------------------------------------------------------------------------------------- | 
|                                                                                                                                                                                                                                      |  |                         |           |                                                                                             | 
|                                                                                                                                                                                                                                      |  | 2 0 0 2                 |           | 2 0 0 1                                                                                     | 
|                                                                                                                                                                                                                                      |  |                         |           |                                                                                             | 
|Revenue                                                                                                                                                                                                                               |  | $                       | 19        |                                                                                             | 
|Research and
  development costs (excluding
      $702 and $1,585 of non-cash compensation for
      the year ended December 31, 2002 and
      cumulative from June 1, 1998 to December 31,
      2002, respectively) (Note 10a)     |  |                         | 486       |                                                                                             | 
|Sales and
  marketing expenses, net (Note 10b)                                                                                                                                                                                        |  |                         | 464       |                                                                                             | 
|General and
  administrative expenses (excluding
      $90 and $2,420 of non-cash compensation for
      the year ended December 31, 2002 and
      cumulative from June 1, 1998 to December 31,
      2002, respectively) (Note 10c) |  |                         | 784       |                                                                                             | 
|Provision
  for legal claim (Note 7c)                                                                                                                                                                                                 |  |                         | (500      | )                                                                                           | 
|Impairment
  of goodwill (Note 11)                                                                                                                                                                                                    |  |                         | -         |                                                                                             | 
|Loss
  allowance on loan to related party (Note 3)                                                                                                                                                                                    |  |                         | -         |                                                                                             | 
|Collection
  of loan from related party (Note 3)                                                                                                                                                                                      |  |                         | (266      | )                                                                                           | 
|Write-down
  of investment in affiliate                                                                                                                                                                                               |  |                         | 522       |                                                                                             | 
|Provision
  for a Bank guarantee (Note 10d)                                                                                                                                                                                           |  |                         | 716       |                                                                                             | 
|Non-cash
  compensation expenses                                                                                                                                                                                                      |  |                         | 792       |                                                                                             | 
|                                                                                                                                                                                                                                      |  |                         |           |                                                                                             | 
|Total costs
  and expenses                                                                                                                                                                                                            |  |                         | 2,998     |                                                                                             | 
|                                                                                                                                                                                                                                      |  |                         |           |                                                                                             | 
|                                                                                                                                                                                                                                      |  |                         |           |                                                                                             | 
|Operating loss                                                                                                                                                                                                                        |  |                         | (2,979    | )                                                                                           | 
|                                                                                                                                                                                                                                      |  |                         |           |                                                                                             | 
|Financial
  income, net                                                                                                                                                                                                               |  |                         | 32        |                                                                                             | 
|Loss on sale
  of property and equipment                                                                                                                                                                                              |  |                         | -         |                                                                                             | 
|Taxes on
  income                                                                                                                                                                                                                     |  |                         | (74       | )                                                                                           | 
|Share in
  losses of affiliate                                                                                                                                                                                                        |  |                         | -         |                                                                                             | 
|                                                                                                                                                                                                                                      |  |                         |           |                                                                                             | 
|Loss from continuing operations                                                                                                                                                                                                       |  |                         | (3,021    | )                                                                                           | 
|                                                                                                                                                                                                                                      |  |                         |           |                                                                                             | 
|Discontinued operations:                                                                                                                                                                                                              |  |                         |           |                                                                                             | 
|Loss from
  operations of electrical division                                                                                                                                                                                         |  |                         | -         |                                                                                             | 
|Loss on sale
  of electrical division                                                                                                                                                                                                 |  |                         | -         |                                                                                             | 
|                                                                                                                                                                                                                                      |  |                         |           |                                                                                             | 
|Loss for the period                                                                                                                                                                                                                   |  | $                       | (3,021    | )                                                                                           | 
|                                                                                                                                                                                                                                      |  |                         |           |                                                                                             | 
|                                                                                                                                                                                                                                      |  |                         |           |                                                                                             | 
|Per share data (Note 2g)                                                                                                                                                                                                              |  |                         |           |                                                                                             | 
|Basic and
  diluted:                                                                                                                                                                                                                  |  |                         |           |                                                                                             | 
|Loss per share from continuing operations                                                                                                                                                                                             |  | $                       | (0.41     | )                                                                                           | 
|                                                                                                                                                                                                                                      |  |                         |           |                                                                                             | 
|Loss from discontinued operations                                                                                                                                                                                                     |  | $                       | -         |                                                                                             | 
|                                                                                                                                                                                                                                      |  |                         |           |                                                                                             | 
|Net loss                                                                                                                                                                                                                              |  | $                       | (0.41     | )                                                                                           | 
|                                                                                                                                                                                                                                      |  |                         |           |                                                                                             | 
|Shares used in computing
    loss per ordinary share                                                                                                                                                                                  |  |                         |           |                                                                                             | 
|Basic and
  diluted                                                                                                                                                                                                                   |  |                         | 7,362,390 |                                                                                             | 
|                                                                                                                                                                                                                                      |  |                         |           |                                                                                             | 

The accompanying notes are an integral part
of the financial statements

- 4 -

---

---

MARNETICS
BROADBAND TECHNOLOGIES LTD.(A Development Stage Company)
(U.S$ in thousands)STATEMENTS OF SHAREHOLDERS EQUITY

|                                                                                            |  | Number
  of shares |           | Share
  capital |  | Additional
  paid-in
  capital |     | Deferred
  compensation |  | Deficit
  accumulated
  during the
  development
  stage |        | Total | 
|------------------------------------------------------------------------------------------- |  | ------------------ | --------- | --------------- |  | ------------------------------ | --- | ----------------------- |  | -------------------------------------------------------- | ------ | ----- | 
|                                                                                            |  |                    |           |                 |  |                                |     |                         |  |                                                          |        |       | 
|January 1, 2000                                                                             |  |                    | 266,559   |                 |  | $                              | 1   |                         |  | $                                                        | 828    |       | 
|Issuance of share capital                                                                   |  |                    | 388,237   |                 |  |                                | 1   |                         |  |                                                          | 7,297  |       | 
|Adjustments due to issuance of shares of a development
  - stage affiliate to a third party |  |                    |           |                 |  |                                |     |                         |  |                                                          | 1,095  |       | 
|Issuance of options to a related party                                                      |  |                    |           |                 |  |                                |     |                         |  |                                                          | 270    |       | 
|Deferred compensation related to employee stock option
  grants                             |  |                    |           |                 |  |                                |     |                         |  |                                                          | 631    |       | 
|Adjustments due to reverse merger - additional
  compensation due to a new measurement date |  |                    |           |                 |  |                                |     |                         |  |                                                          | 1,836  |       | 
|Amortization of deferred compensation                                                       |  |                    |           |                 |  |                                |     |                         |  |                                                          |        |       | 
|Adjustments due to reverse merger                                                           |  |                    | 759,489   |                 |  |                                | 30  |                         |  |                                                          |        |       | 
|Issuance of shares in a reverse merger                                                      |  |                    | 4,993,048 |                 |  |                                | 98  |                         |  |                                                          | 11,186 |       | 
|Compensation relating to options granted to former CEO
  and chairman of the board          |  |                    |           |                 |  |                                |     |                         |  |                                                          | 2,000  |       | 
|Loss for the period                                                                         |  |                    |           |                 |  |                                |     |                         |  |                                                          |        |       | 
|                                                                                            |  |                    |           |                 |  |                                |     |                         |  |                                                          |        |       | 
|Balance at December
  31, 2000                                                              |  |                    | 6,407,333 |                 |  |                                | 130 |                         |  |                                                          | 25,143 |       | 
|                                                                                            |  |                    |           |                 |  |                                |     |                         |  |                                                          |        |       | 
|Amortization of deferred compensation                                                       |  |                    |           |                 |  |                                |     |                         |  |                                                          |        |       | 
|Compensation related to options granted to
  service providers                              |  |                    |           |                 |  |                                |     |                         |  |                                                          | 60     |       | 
|Issuance of shares for no consideration                                                     |  |                    | 955,057   |                 |  |                                |     |                         |  |                                                          |        |       | 
|Loss for the year                                                                           |  |                    |           |                 |  |                                |     |                         |  |                                                          |        |       | 
|                                                                                            |  |                    |           |                 |  |                                |     |                         |  |                                                          |        |       | 
|Balance at December
  31, 2001                                                              |  |                    | 7,362,390 |                 |  |                                | 130 |                         |  |                                                          | 25,203 |       | 
|                                                                                            |  |                    |           |                 |  |                                |     |                         |  |                                                          |        |       | 
|Amortization of deferred compensation                                                       |  |                    | -         |                 |  |                                |     |                         |  |                                                          |        |       | 
|Loss for the year                                                                           |  |                    | -         |                 |  |                                |     |                         |  |                                                          |        |       | 
|                                                                                            |  |                    |           |                 |  |                                |     |                         |  |                                                          |        |       | 
|Balance at December
  31, 2002                                                              |  |                    | 7,362,390 |                 |  | $                              | 130 |                         |  | $                                                        | 25,203 |       | 
|                                                                                            |  |                    |           |                 |  |                                |     |                         |  |                                                          |        |       | 

The accompanying notes are an integral part
of the financial statements

- 5 -

---

---

MARNETICS
BROADBAND TECHNOLOGIES LTD(A Development Stage Company)
(U.S$ in thousands)STATEMENTS OF CONSOLIDATED CASH FLOWS

|                                                                                                      |                                                         | Year ended December 31, |        | Cumulative from
  June 1, 1998(date
  of commencement of operations) to
  December 31, |  
|----------------------------------------------------------------------------------------------------- | ------------------------------------------------------- | ----------------------- | ------ | -------------------------------------------------------------------------------------- | -
|                                                                                                      |                                                         |                         |        |                                                                                        |  
|                                                                                                      |                                                         | 2 0 0 2                 |        | 2 0 0 1                                                                                |  
|                                                                                                      |                                                         |                         |        |                                                                                        |  
|Cash flows from operating
  activities:                                                               |                                                         |                         |        |                                                                                        |  
|Loss
  for the period                                                                                 |                                                         | $                       | (3,021 | )                                                                                      |  
|Adjustments
  to reconcile loss
  for the period to cash used
  in operating activities (Appendix A): |                                                         |                         | 1,630  |                                                                                        |  
|                                                                                                      |                                                         |                         |        |                                                                                        |  
|                                                                                                      | Net
  cash used in operating activities                 |                         |        | (1,391                                                                                 | )
|                                                                                                      |                                                         |                         |        |                                                                                        |  
|                                                                                                      |                                                         |                         |        |                                                                                        |  
|Cash flows from investing activities:                                                                 |                                                         |                         |        |                                                                                        |  
|Cash
  acquired in a non-cash reverse
      merger (Appendix B)                                       |                                                         |                         | -      |                                                                                        |  
|Purchase
  of fixed assets                                                                            |                                                         |                         | (20    | )                                                                                      |  
|Proceeds
  from sale of fixed assets                                                                  |                                                         |                         | -      |                                                                                        |  
|                                                                                                      |                                                         |                         |        |                                                                                        |  
|                                                                                                      | Net
  cash used in
     investing activities            |                         |        | (20                                                                                    | )
|                                                                                                      |                                                         |                         |        |                                                                                        |  
|                                                                                                      |                                                         |                         |        |                                                                                        |  
|Cash flows from financing activities:                                                                 |                                                         |                         |        |                                                                                        |  
|Short-term
  debt, net                                                                                |                                                         |                         | (50    | )                                                                                      |  
|Repayment
  of long-term loan                                                                         |                                                         |                         | -      |                                                                                        |  
|Issuance
  of share capital                                                                           |                                                         |                         | -      |                                                                                        |  
|Investment
  in affiliate                                                                             |                                                         |                         | -      |                                                                                        |  
|                                                                                                      |                                                         |                         |        |                                                                                        |  
|                                                                                                      | Net
  cash provided by (used in)
  financing activities |                         |        | (50                                                                                    | )
|                                                                                                      |                                                         |                         |        |                                                                                        |  
|                                                                                                      |                                                         |                         |        |                                                                                        |  
|Increase
  (decrease) in cash
    and cash equivalents                                                |                                                         |                         | (1,461 | )                                                                                      |  
|                                                                                                      |                                                         |                         |        |                                                                                        |  
|Cash
  and cash equivalents
    at the beginning of the period                                        |                                                         |                         | 2,418  |                                                                                        |  
|                                                                                                      |                                                         |                         |        |                                                                                        |  
|                                                                                                      |                                                         |                         |        |                                                                                        |  
|Cash
  and cash equivalents
    at the end of the period                                              |                                                         | $                       | 957    |                                                                                        |  
|                                                                                                      |                                                         |                         |        |                                                                                        |  

The accompanying notes are an integral part
of the financial statements

- 6 -

---

---

MARNETICS BROADBAND
TECHNOLOGIES LTD(A Development Stage Company)
(U.S$ in thousands)

APPENDICES TO CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                           |  | Year ended December 31, |       | Cumulative
  from
  June 1, 1998(date
  of
  commencement of
  operations) to
  December 31, | 
|------------------------------------------------------------------------------------------ |  | ----------------------- | ----- | -------------------------------------------------------------------------------------------- | 
|                                                                                           |  |                         |       |                                                                                              | 
|                                                                                           |  | 2 0 0 2                 |       | 2 0 0 1                                                                                      | 
|                                                                                           |  |                         |       |                                                                                              | 
|Appendix
  A                                                                               |  |                         |       |                                                                                              | 
|Adjustments to reconcile loss for
  the period to net cash used in
  operating activities: |  |                         |       |                                                                                              | 
|                                                                                           |  |                         |       |                                                                                              | 
|Depreciation                                                                               |  | $                       | 70    |                                                                                              | 
|Loss on sale of fixed assets                                                               |  |                         | -     |                                                                                              | 
|Accrued severance pay                                                                      |  |                         | 8     |                                                                                              | 
|Share in losses of affiliate                                                               |  |                         | -     |                                                                                              | 
|Loss on sale of discontinued
      operations (Appendix C)                                 |  |                         | -     |                                                                                              | 
|Impairment of goodwill                                                                     |  |                         | -     |                                                                                              | 
|Loss allowance on loan to related    party                                                 |  |                         | -     |                                                                                              | 
|Non cash compensation expenses                                                             |  |                         | 792   |                                                                                              | 
|Write-down for decline in value of
      investees                                         |  |                         | 522   |                                                                                              | 
|Provision for a bank guarantee                                                             |  |                         | 716   |                                                                                              | 
|Changes in assets and liabilities:                                                         |  |                         |       |                                                                                              | 
|Decrease (increase) in accounts
      receivable                                           |  |                         | (13   | )                                                                                            | 
|Increase in other receivables                                                              |  |                         | (54   | )                                                                                            | 
|Decrease in inventories                                                                    |  |                         | -     |                                                                                              | 
|(Decrease) increase in trade payables                                                      |  |                         | (116  | )                                                                                            | 
|(Decrease) Increase in other payables
      and accrued expenses                           |  |                         | (295  | )                                                                                            | 
|                                                                                           |  |                         |       |                                                                                              | 
|                                                                                           |  | $                       | 1,630 |                                                                                              | 
|                                                                                           |  |                         |       |                                                                                              | 
|                                                                                           |  |                         |       |                                                                                              | 
|Supplemental
  Cash Flow Data                                                              |  |                         |       |                                                                                              | 
|Appendix B:                                                                                |  |                         |       |                                                                                              | 
|Purchase of a subsidiary in a
    reverse merger:                                          |  |                         |       |                                                                                              | 
|Current
  assets                                                                           |  |                         |       |                                                                                              | 
|Non-current
  assets                                                                       |  |                         |       |                                                                                              | 
|Fixed
  assets                                                                             |  |                         |       |                                                                                              | 
|Goodwill                                                                                   |  |                         |       |                                                                                              | 
|Current
  liabilities                                                                      |  |                         |       |                                                                                              | 
|Long-term
  liabilities                                                                    |  |                         |       |                                                                                              | 
|Cash
  acquired                                                                            |  |                         |       |                                                                                              | 
|                                                                                           |  |                         |       |                                                                                              | 
|                                                                                           |  |                         |       |                                                                                              | 
|Total
  non-cash consideration                                                             |  |                         |       |                                                                                              | 
|                                                                                           |  |                         |       |                                                                                              | 

The accompanying notes are an integral part
of the financial statements

- 7 -

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---

MARNETICS BROADBAND TECHNOLOGIES LTD.(A Development Stage Company)(U.S$ in thousands)

APPENDICES TO CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                                                        |  | Year ended December 31, |  | Cumulative
  from
  June 1, 1998(date
  of
  commencement of
  operations) to
  December 31, | 
|----------------------------------------------------------------------------------------------------------------------- |  | ----------------------- |  | -------------------------------------------------------------------------------------------- | 
|                                                                                                                        |  |                         |  |                                                                                              | 
|                                                                                                                        |  | 2 0 0 2                 |  | 2 0 0 1                                                                                      | 
|                                                                                                                        |  |                         |  |                                                                                              | 
|Appendix C:                                                                                                             |  |                         |  |                                                                                              | 
|Sale of electrical division:                                                                                            |  |                         |  |                                                                                              | 
|Current
  assets                                                                                                        |  |                         |  |                                                                                              | 
|Fixed
  assets                                                                                                          |  |                         |  |                                                                                              | 
|Goodwill                                                                                                                |  |                         |  |                                                                                              | 
|Current
  liabilities                                                                                                   |  |                         |  |                                                                                              | 
|Long-term
  liabilities                                                                                                 |  |                         |  |                                                                                              | 
|                                                                                                                        |  |                         |  |                                                                                              | 
|Loss on sale of electrical division
  (see Note 3b)                                                                     |  |                         |  |                                                                                              | 
|                                                                                                                        |  |                         |  |                                                                                              | 
|                                                                                                                        |  |                         |  |                                                                                              | 
|Information on non-cash
  transactions                                                                                  |  |                         |  |                                                                                              | 
|Extinguishments of a short-term
      debt to bank in exchange for
      assignment of a receivable
      (see Note 3b) |  |                         |  |                                                                                              | 
|                                                                                                                        |  |                         |  |                                                                                              | 
|Short-term
  debt                                                                                                       |  |                         |  |                                                                                              | 
|Assignment
  of a receivable                                                                                            |  |                         |  |                                                                                              | 
|                                                                                                                        |  |                         |  |                                                                                              | 
|                                                                                                                        |  |                         |  |                                                                                              | 
|                                                                                                                        |  |                         |  |                                                                                              | 

The accompanying notes are an integral part
of the financial statements

- 8 -

---

---

MARNETICS BROADBAND TECHNOLOGIES LTD.
(A Development Stage Company)
Notes to the Consolidated Financial Statements

Note 1 
General

|a. | Marnetics Broadband Technologies Ltd. (formerly Stav Electrical
  Systems (1994) Ltd.) (the Company or Stav) is
  engaged in the development of capacity enhancement and traffic analysis
  solutions for IP networks through its wholly owned subsidiary Marnetics Ltd.
  (Marnetics) and was engaged in the manufacture, installation and
  maintenance of electrical and lighting systems, mainly for public
  institutions (see below).                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | On June 1, 2000 a share
  exchange agreement (the agreement) was signed between the Company and
  Marnetics. The agreement was consummated after final approval of the
  Companys shareholders on December 31, 2000. Pursuant to the agreement, the
  Company issued to the shareholders of Marnetics shares and options in the
  amounts of 4,993,048 and 1,761,236 respectively, representing 75% of its
  outstanding shares and options, on a fully diluted basis,  in exchange for all shares in  Marnetics.                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | The merger between
  Marnetics and the Company was accounted for as a reverse merger. As the
  shareholders of Marnetics (as a group) received the largest ownership
  interest in the Company, Marnetics was determined to be the accounting
  acquirer in the reverse acquisition. As a result, the historical financial
  statements of the Company (prior to December 31, 2000) were replaced with the
  historical financial statements of Marnetics. The statements of operations
  for 2000 and 1999 include the operations of Marnetics. The December 31, 2000
  balance sheet includes the accounts of the Company and Marnetics. The fair
  value of Stav shares, US$11,314,280 was determined on the basis of the
  average market price of its outstanding shares US$8.00 per share. Goodwill in
  the amount of $11,309,000 was recorded accordingly.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | The following unaudited
  pro forma summary present information as if the acquisition of Stav occurred
  at the beginning of the periodpresented. The pro
  forma information, which is provided for informational purposes only, is
  based on historical information and does not necessarily reflect the results
  that would have occurred, nor is it necessarily indicative of future results
  of operations of the consolidated entities.                                                                                                                                                                                                                                                                                                                                                                                                                    

| |                       |  | (Unaudited)             |        
| | --------------------- |  | ----------------------- | -------
| |                       |  |                         |        
| |                       |  | Year ended December 31, |        
| |                       |  |                         |        
| |                       |  | 2 0 0 0                 |        
| |                       |  |                         |        
| |                       |  |                         |        
| | Revenues              |  | $                       | 4,498  
| | Net
  income          |  |                         | (10,751
| | Earnings
  per share: |  |                         |        
| | Basic                 |  |                         | (1.68  
| | Diluted               |  | $                       | (1.68  

| | Effective
  March 2001 the Company sold to Idan Millennium Investments and Assets Ltd
  (IDAN) , a company under the control of Mr. Strikovsky, former CEO and
  former chairman of the board, all the fixed assets, inventories, other assets and
  liabilities and goodwill related to the electrical operations for a
  consideration of $ 597,000. The balance of $ 597,000 was not recognized as the
  probability of its realization was in doubt (See also Note 3).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

- 9 -

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---

MARNETICS BROADBAND TECHNOLOGIES LTD.
(A Development Stage Company)
Notes to the Consolidated Financial Statements

Note 1  General(cont.)

|b.                                         | The
  accompanying financial statements have been prepared assuming that the
  Company will continue as a going concern which contemplates the realization
  of assets and the satisfaction of liabilities in the normal course of
  business.                                                                                                                                                                                                                                                                                                           
|------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                           | The Company
  has a limited operating history and has sustained losses since its inception.
  As shown in the accompanying financial statements, the Company incurred a net
  loss of $ 3,021,000 for the year ended December 31, 2002 and as of that date
  has accumulated loss of $ 24,333,000. The future of the Company is dependent
  upon future profitable operations from the commercial success of its
  operations. Management is seeking additional capital and M&A transactions
  that will provide funds needed to continue its operations.
|                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                           | In April 2003 and in light
  of the current financial position and liquidity considerations, the Companys
  board of directors resolved to decrease its level of operating expenses and
  to lay-off the majority of the Companys employees and seek a potential
  purchaser for the subsidiary or its IP. Management anticipates that its cash
  balance will be sufficient to finance its operations until September 2003.                                                                                                                           
|                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                           | The
  consolidated financial statements do not include any adjustments that might
  result from the outcome of this uncertainty and these adjustments may be
  material.                                                                                                                                                                                                                                                                                                                                                                                 
|                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|Note 2 -
  Significant accounting policies
|                                          
|a.                                         | Development-stage
  enterprise                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                           | Since planned principal
  operations have not yet begun to generate any revenues, the Company is a
  development-stage company. All pre-operating costs have been expensed as
  incurred.                                                                                                                                                                                                                                                                                                                                                                
|                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|b.                                         | Use of
  estimates in the preparation of financial statements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                           | The preparation of
  financial statements in conformity with generally accepted accounting
  principles requires management to make estimates and assumptions that affect
  the reported amounts of assets and liabilities and disclosure of contingent
  assets and liabilities at the date of the financial statements and the
  reported amounts of revenues and expenses during the reporting periods.
  Actual results could differ from those estimates.                                                                                           
|                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|c.                                         | Financial
  statements in U.S. dollars                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                           | The reporting currency of
  the Company is the U.S. dollar. The currency of the primary economic
  environment in which the operations of the Company are conducted is the
  dollar, and the dollar has been determined to be the Companys functional
  currency.                                                                                                                                                                                                                                                                                       
|                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|                                           | Transactions and balances
  originally denominated in dollars are presented at their original amounts.
  Non-dollar transactions and balances have been remeasured into dollars in
  accordance with the principles set forth in Statement of Financial Accounting
  Standards (SFAS) No. 52 Foreign Currency Translation. All exchange gains
  and losses from remeasurement of monetary balance sheet items resulting from
  transactions in non-dollar currencies are reflected in the statement of
  operations as they occur.                   

-
10 -

---

---

MARNETICS BROADBAND TECHNOLOGIES LTD.
(A Development Stage Company)
Notes to the Consolidated Financial Statements

Note 2 - Significant accounting policies(cont.)

|d. | Cash
  equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | Cash equivalents consist
  of short-term, highly liquid investments that are readily convertible into
  cash with original maturities when purchased of three months or less.                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|e. | Fixed
  assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | Property and equipment are
  stated at cost. Depreciation is calculated using the straight-line method over
  the estimated useful lives of the assets, as follows:                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | Computers and software                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | Furniture and fixtures                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | The Company
  periodically assesses the recoverability of the carrying amount of property
  and equipment based on expected undiscounted cash flows. If an assets
  carrying amount is determined to be not recoverable, the Company recognizes
  an impairment loss based upon the difference between the carrying amount and
  the fair value
  of such assets, in accordance with SFAS No. 144 Accounting for the
  Impairment or Disposal of Long-Lived Assets (SFAS No. 144).
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|f. | Research
  and development costs                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | Research and development
  costs are expensed as incurred.                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|g. | Earnings
  per share                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | The Company has adopted
  Statement No. 128 of the FASB Earnings Per Share (SFAS 128). Basic and
  diluted earnings per ordinary share are computed using the weighted average
  number of shares outstanding.                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|h. | Deferred
  income taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | Deferred income taxes are
  provided for temporary differences between the assets and liabilities, as
  measured for financial statement purposes and for tax purposes, at tax rates
  expected to be in effect when these differences reverse.                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|i. | Fair
  value of financial instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | The financial instruments
  of the Company consist mainly of cash and cash equivalents, current accounts
  receivable, accounts payable and accruals. Due to the relatively short period
  to maturity, the fair value of the financial instruments included in the
  working capital of the Company approximates their carrying amounts.                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|j. | Reclassification                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   | Certain figures from prior
  years have been reclassified in order to conform to the 2002 presentation.                                                                                                                                                                                                                                                                                                                                                                                

-
11 -

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---

MARNETICS BROADBAND TECHNOLOGIES LTD.
(A Development Stage Company)
Notes to the Consolidated Financial Statements

Note 2 - Significant accounting policies(cont.)

|k. | Recent
  accounting pronouncements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | In April 2002, the FASB
  issued SFAS No. 145, Rescission of FASB Statements SFAS Nos. 4, 44, and 64,
  Amendment of FASB Statement No. 13 and Technical Corrections. SFAS No. 145
  will impact how companies account for sale-leaseback transactions and how
  gains or losses on debt extinguishments are presented in financial
  statements. SFAS No. 145 is effective for fiscal years beginning after May
  15, 2002, early application is encouraged. Under the provisions of SFAS 4
  gains and losses associated with extinguishments of debts were reclassified
  as extraordinary item. SFAS No. 145 provides that gains and losses associated
  with extinguishments of debts will be classified as extraordinary item only
  if they meet the criteria of APB Opinion No. 30. The application of the requirements of SFAS No. 145 will not have a
  material impact on the Companys financial position or results of operations.                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | In
  July 2002, the FASB issued SFAS No.146, Accounting for Costs Associated with
  Exit or Disposal Activities. SFAS No. 146 requires that a liability for
  costs associated with an exit or disposal activity be recognized and measured
  initially at fair value only when the liability is incurred. SFAS No. 146 is
  effective for exit or disposal activities that are initiated after December
  31, 2002. The application of the requirements of SFAS No. 146 will not have a
  material impact on the Companys financial position or results of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | In
  November 2002, the FASB issued Interpretation No. 45 (FIN 45), Guarantors
  Accounting and Disclosure Requirements for Guarantees, Including Indirect
  Guarantees of Indebtedness of Others, which clarifies disclosure and
  recognition/measurement requirements related to certain guarantees. The
  disclosure requirements are effective for financial statements issued after
  December 15, 2002 and the recognition/measurement requirements are effective
  on a prospective basis for guarantees issued or modified after December 31,
  2002. The application of the requirements of FIN 45 will not have a material
  impact on the Companys financial position or results of operations.                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   | In
  December 2002, the FASB issued SFAS No. 148, Accounting for Stock Based
  CompensationTransition and Disclosureas Amendment to FAS 123. SFAS 148
  provides two additional transition methods for entities that adopt the
  preferable method of accounting for stock based compensation. Further, the
  statement requires disclosure of comparable information for all companies
  regardless of whether, when, or how an entity adopts the preferable, fair
  value based method of accounting. These disclosures are now required for
  interim periods in addition to the traditional annual disclosure. The
  amendments to SFAS No. 123, which provides for additional transition methods,
  are effective for periods beginning after December 15, 2002, although earlier
  application is permitted. The amendments to the disclosure requirements are
  required for financial reports containing condensed financial statements for
  interim periods beginning after December 15, 2002.

Note 3 - Related parties

|a. | (1) | In prior years the Company granted loan to Mr.
  Strikovsky in the amount of $1,228,000. The loan was linked to the Israeli
  CPI and bore interest of 2% per annum and was repayable in eight annual
  installments each comprised of 1/8 of the principal and the accrued interest
  thereon commencing December 2000. At December 31, 2001 the Company reassessed
  the collectibility of the loan in accordance with provisions of SFAS No. 114
  Accounting by Creditors for Impairment of a Loan, and resolved, considering
  the probability of its collectibility, to establish a loan loss allowance for
  the entire amount. Income from impaired loan will be recorded using the cash
  method. During 2002 $142,000 were repaid on the account of the loan.
|-- | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   | (2) | In prior years Mr. Strikovsky withdrew funds from the
  Company in excess of the maximum allowable amount under the loan agreement.
  During 2002 $91,000 were repaid, in full return of these excess funds.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

- 12 -

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MARNETICS BROADBAND TECHNOLOGIES LTD.
(A Development Stage Company)
Notes to the Consolidated Financial Statements

Note 3 - Related parties(cont.)

|   | (3) | In prior years advances were paid to certain suppliers
  in the amount of $478,000. In accordance with the share exchange agreement
  (see Note 1) the Company asked Mr. Strikovsky for the repayment of such
  amounts. The excess advances were paid during 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|-- | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|b. | (1) | On May 9, 2001 an agreement (the Bank Agreement) was
  signed between the Company and Bank Hapoalim, Ltd.(the Bank) with respect
  to the Companys debt to the Bank in the amount of $3,127,000 (the Debt).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |     | In accordance with the Bank Agreement, the Bank has agreed
  to release the Company from its obligation to repay the Debt and to cancel
  the floating charge and liens registered in favor of the Bank on properties
  of the Company provided that, by May 31, 2001 the Company shall pay $954,000
  to the Bank on account of the Debt (the Repaid Amount) and in addition the Company shall have assigned
  to the Bank all its rights with respect to the debt of the municipality of
  Hod Hasharon to the Company in the amount of 
  $2,173,000. The Company paid the $954,000 and made the assignment in
  the aforesaid amount.                                                                                                                                                                                                        
|   |     | In addition, the Company has provided the Bank with a
  guarantee of up to $716,000, which decreases in the ratio of NIS 1:2 paid on
  account of the outstanding debt of Hod Hasharon (See Note 10d).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | (2) | Following the Bank Agreement, on June 30, 2001 an
  agreement (the Agreement) was signed between Mr. Strikovsky and the Company
  pursuant to which Strikovsky agreed to reimburse the Company for the Repaid
  Amount and any additional amount that the Company may have to pay to the Bank
  if the Bank exercises the guarantee related to the debt of Hod Hasharon. The reimbursement amount of $954,000 is due and payable to the
  Company and will be paid in monthly installments of $48,000 commencing on
  June 1, 2004 until paid in full. All amounts due and payableto the Company are linked to the Israeli
  CPI and bear interest of 4% per annum.                                                                                                                                                                              
|   |     | The reimbursement amount
  of $954,000 was not yet recognized as the probability of its realization is
  in doubt.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | (3) | Effective March 2001 the Company sold to IDAN, a
  company under the control of Strikovsky, all the fixed assets, inventories,
  other assets and liabilities and related goodwill, in the amount of
  $2,000,000, relating to the electrical operations for a consideration of
  $597,000. The consideration is payable in 25 monthly installments of $24,000
  commencing February 1, 2002. In May 2002 the Company signed an addendum with
  IDAN to change the terms of payments to such that the first 11 installment
  will be reduced to $7,000 each and the remaining 14 installments will be of
  $37,000. The Company, considering the probability of collection, decided to
  establish an allowance of $597,000 on the amount not yet collected. As of
  December 31, 2002  $71,000 were repaid
  on account of the sale consideration.
|   |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | (4) | To secure his obligations under the various agreements
  Mr. Strikovsky has collateralized 300,000 shares that he owns of the Company.
  No other payments were made by Mr. Strikovski subsequent to December 31,
  2002. The Company is involved in ongoing legal efforts aimed at collecting
  amounts due from Mr. Strikovsky and companies under his control.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

Note 4  Investment in affiliate

Until
September 2000 the Company held 33.6% of the outstanding shares of Speedwise
Technologies Ltd (Speedwise). In September 2000, Speedwise issued shares to a
third party resulting in a decrease in the Companys holdings in Speedwise to
19.19% and during February 2001 additional shares were issued to third parties
resulting in a further dilution to 14.73%. In October 2002 Speedwise sold its
assets and intellectual property to a third party in consideration of cash and
shares. Based on the consideration received by Speedwise, the Company assesses
that the recoverable amount of its investment in Speedwise will be $60,000 and
as a result an impairment charge of $522,000 has been recorded.

- 13 -

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---

MARNETICS BROADBAND TECHNOLOGIES LTD.
(A Development Stage Company)
Notes to the Consolidated Financial Statements

Note 5  Fixed assets

|                            |                          | December 31, |     
|--------------------------- | ------------------------ | ------------ | ----
|                            |                          |              |     
|                            |                          | 2 0 0 2      |     
|                            |                          |              |     
|Cost:                       |                          |              |     
|                            | Computers and software   |              | $   
|                            | Leasehold
  improvements |              |     
|                            | Furniture and fixtures   |              |     
|                            |                          |              |     
|                            |                          | $            | 287 
|                            |                          |              |     
|Accumulated
  depreciation: |                          |              |     
|                            | Computers and software   |              | $   
|                            | Leasehold
  improvements |              |     
|                            | Furniture and fixtures   |              |     
|                            |                          |              |     
|                            |                          | $            | (134
|                            |                          |              |     

Note 6 - Supplementary balance sheet information

| | a. | Other receivables
| | -- | -----------------

| |                          |  | December 31, |    
| | ------------------------ |  | ------------ | ---
| |                          |  |              |    
| |                          |  | 2 0 0 2      |    
| |                          |  |              |    
| |                          |  |              |    
| | Prepaid
  expenses       |  | $            | 60 
| | Restricted
  cash        |  |              | 30 
| | Government
  authorities |  |              | 199
| | Others                   |  |              | 2  
| |                          |  |              |    
| |                          |  | $            | 291
| |                          |  |              |    

| | b. | Short-term bank credit
| | -- | ----------------------

| |                                             |  | Interest rates |           | December 31, | 
| | ------------------------------------------- |  | -------------- | --------- | ------------ | 
| |                                             |  |                |           |              | 
| |                                             |  | %              |           | 2 0 0 2      | 
| |                                             |  |                |           |              | 
| |                                             |  |                |           |              | 
| | Unlinked shekel credit                      |  |                |           |              | 
| | Overdraft                                   |  |                | 13.7-10.2 |              | 
| | Short-term
  loans                          |  |                | 6.2-10.2  |              | 
| |                                             |  |                |           |              | 
| |                                             |  |                |           |              | 
| |                                             |  |                |           |              | 
| | Current
  maturities of
    long-term loans |  |                |           |              | 
| |                                             |  |                |           |              | 
| |                                             |  |                |           |              | 
| |                                             |  |                |           |              | 

| |    | Liens - see Note 7c.
| | -- | --------------------
| |    |                     
| | c. | Other payables:     

| |                                             |  | December 31, |      
| | ------------------------------------------- |  | ------------ | -----
| |                                             |  |              |      
| |                                             |  | 2 0 0 2      |      
| |                                             |  |              |      
| | Wages and related accruals                  |  | $            | 82   
| | Government authorities                      |  |              | 98   
| | Other accrued expenses
  (see also Note 7b) |  |              | 354  
| | Provision for a Bank
  guarantee            |  |              | 716  
| |                                             |  |              |      
| |                                             |  | $            | 1,250
| |                                             |  |              |      

- 14 -

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MARNETICS BROADBAND TECHNOLOGIES LTD.
(A Development Stage Company)
Notes to the Consolidated Financial Statements

Note 7  Commitments and contingent
liabilities

|a. | Lease
  agreement                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | The facilities of the
  subsidiary are rented under an operating lease. The agreement included a
  lease extension option to extend the lease for one year period upon prior
  written notice. The Company exercised the option and extended the lease term
  for additional year until May 2003. The rent expenses under the operating
  lease for the year ended December 31, 2002 totaled $ 31,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|b. | Liens,
  security and guarantees                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | 2.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|c. | Legal
  claim                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | The
  Company and Mr. Strikovski was named as a defendant in a claim for specific
  performance of an agreement allegedly entered into by the Company and the
  plaintiff in April 1999 (the Agreement) as well as damages as a result of a
  breach of the agreement. On July 2, 2001, due to the fact that no defense
  and/or reply was provided by the Company, judgment was entered against the
  Company in the amount of $725,000. On February 7, 2002 the Company filed a
  motion to vacate the judgment and on February 27, 2002 the court rejected the
  motion. The Company
  filed an appeal on the court decision which was accepted by the Supreme Court
  of the State New York with instructions to allow evidentiary hearing. The
  hearing was held on May 22, 2003 and the Company is awaiting the courts
  decision. The plaintiff proposed to settle
  the suit for $250,000 and while the Company was willing to further negotiate
  a substantially lower amount, in light of the plaintiffs position the
  Company decided to reject the proposal. In 2001 the Company has established
  an allowance in the amount of $750,000 to provide for its possible exposure.
  In light of recent developments the Company decreased the allowance by
  $500,000 to $250,000 which, in light of the judgment against the Company and
  the settlement offer proposed, represents 
  a conservative estimate of the probable exposure.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|d. | Royalties                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | The Company
  is committed to pay royalties to the office of the Chief Scientist of the
  Government of Israel on proceeds from sales of products in the research and
  development of which the Chief Scientist has participated by way of grants,
  up to the amount of 100% of the grants received, in dollar terms plus
  interest at LIBOR. The royalties are payable at a rate of 3% for the first
  three years of product sales and 3.5% thereafter. No royalties  were paid to the Chief Scientist.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | The total
  amount of grants accrued at December 31, 2002 was $ 140,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | The research
  and development grants are presented in the statements of operations as an
  offset to research and development costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | The refund
  of the grant is contingent on future sales and the Company has no obligation
  to refund these grants, if sufficient sales are not generated.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | Based on the
  terms established in the agreement with the OCS the Company may not sell its
  IP to a non-Israeli entity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

- 15 -

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MARNETICS BROADBAND TECHNOLOGIES LTD.
(A Development Stage Company)
Notes to the Consolidated Financial Statements

Note 8 - Share capital

|a. | In
  December 1998 the Company consummated an Initial Public Offering (IPO).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | Subsequent
  to the IPO, the Companys ordinary shares were quoted and listed on the
  American Stock Exchange (AMEX). In April 2003 the AMEX had notified the
  Company that it no longer qualify for trading and that its shares would be
  delisted from trading on the AMEX. The Companys shares are now traded on the
  Pink Sheets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|b. | In
  January 2000, Marnetics issued 36,318 ordinary shares of NIS 0.01 par
  value to an investor in consideration for $295,000. In addition, Marnetics granted the investor options to purchase 10,465
  outstanding shares of the Company at $8.12 per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|c. | In
  February 2000, Marnetics issued 130,719 ordinary shares of NIS 0.01 par
  value to ECI Telecom Ltd. for $2,000 thousand.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|d. | Through
  September 30, 2000, Marnetics had granted to specific employees options to
  purchase 40,437 ordinary shares of the Companys subsidiary pursuant to their
  employment agreements. The exercise price of the options is $1. Most of the
  options vest over four years. As part of the share exchange agreement these
  options were replaced with 308,300 options to purchase ordinary shares
  of  the Company (see also Note 8(g)
  below).                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|e. | In
  October 2000 Marnetics reached an agreement with a group of new
  investors (the Investors). In accordance with the agreement, the Company issued
  to the Investors 221,200 ordinary shares in consideration of $5,076 thousand.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|f. | On June 1, 2000 a share
  exchange agreement (the agreement) was signed between the Company and
  Marnetics. The agreement was consummated after final approval of the
  Companys shareholders on December 20, 2000. Pursuant to the agreement the
  Company issued to the shareholders of Marnetics shares and options in the
  amounts of 4,993,048 and 1,761,236 (including 308,300 options to employees of
  Marnetics - see 8(g) below) respectively, representing 75% of its outstanding
  shares and options, on a fully diluted basis, in exchange for all shares
  in  Marnetics.                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|g. | Pursuant to the agreement
  the Company issued newly unvested options to purchase 308,300 ordinary shares of the Company to the employees of Marnetics for their
  unvested options in Marnetics. In connection with this issuance, the Company
  recorded a deferred stock compensation expense totaling $1,836,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|h. | In connection with the
  agreement, the Board of Directors of the Company adopted an Option Plan (the
  Option Plan).  The Option Plan
  provides for the grant of options to purchase up to an aggregate of 1,000,000
  Ordinary Shares to directors, key employees and consultants of the Company.
  The Board of Directors of the Company will determine the terms of the grants.
  Under the Option Plan, the Company granted, to a company under the control of
  the former CEO and chairman of the board of the Company, 400,000 fully vested
  options to purchase shares at the exercise price of $3. With respect to these options non-cash
  compensation expenses totaling $2,000,000 were recorded and charged to
  earnings in accordance with APB 25 Accounting for Stock Issued to
  Employees.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   | The amount of options
  outstanding as at December 31, 2002 is 2,151,664 of which 268,772 were
  granted to employees.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|i. | During 2001, option
  granted to Marnetics certain shareholder in connection with the merger, were
  expired unexercised. According to the merger agreement such options must be
  divided pro-ratably between the formers shareholder of Marnetics. In 2001 the
  Company issued 955,057 shares which were divided pro-ratably according to the
  agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                      

-
16 -

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MARNETICS BROADBAND TECHNOLOGIES LTD.
(A Development Stage Company)
Notes to the Consolidated Financial Statements

Note 9  Taxes on income

The Company is assessed under the provisions of the
Israeli Income Tax Law (Inflationary Adjustments) 1985, pursuant to which
results for tax purposes are measured in new Israeli shekels in real terms in
accordance with changes in the Israeli consumer price index.

Income is taxable at the ordinary corporate tax rate of
36%.

Deferred taxes

The
main components of the Companys deferred tax assets are as follows:

|                                             |         | December 31, |       
|-------------------------------------------- | ------- | ------------ | ------
|                                             |         |              |       
|                                             |         | 2 0 0 2      |       
|                                             |         |              |       
|Deferred
  tax assets:                       |         |              |       
|Net
  operating loss carryforwards in Israel |         | $            | (2,545
|Less
   Valuation allowance                 |         |              | 2,545 
|                                             |         |              |       
|                                             | Balance |              | $     
|                                             |         |              |       
|                                             |         |              |       

Under
SFAS No. 109, deferred tax assets are to be recognized for the anticipated tax
benefits associated with net operating loss carryforwards and deductible
temporary differences, unless it is more likely than not that some or all of
the deferred tax assets will not be realized. The adjustment is made by a
valuation allowance.

Since
the realization of the net operating loss carry forwards is less likely than
not, a valuation allowance has been established for the amounts of the related
tax benefits.

Tax
loss carry forwards of the Company and its subsidiary company totaling
US$ 7,070
thousand are unlimited in duration, denominated in NIS and linked to the
Israeli consumer price index.

Tax assessments

The
Company has closed assessments through 1998, inclusive. The Subsidiary has not
been assessed for income tax purposes since incorporation.

Note 10 - Supplementary statement of operations information

|a. | Research
  and development costs
|-- | --------------------------------

| |                                                     |  | Year ended December 31, |     | Cumulative from
  June 1, 1998(date
  of
  commencement of
  operations) to
  December 31, | 
| | --------------------------------------------------- |  | ----------------------- | --- | ------------------------------------------------------------------------------------------ | 
| |                                                     |  |                         |     |                                                                                            | 
| |                                                     |  | 2 0 0 2                 |     | 2 0 0 1                                                                                    | 
| |                                                     |  |                         |     |                                                                                            | 
| | Salaries and related
    expenses                   |  |                         | 534 |                                                                                            | 
| | Sub-contractors                                     |  |                         | -   |                                                                                            | 
| | Depreciation                                        |  |                         | 61  |                                                                                            | 
| | Other                                               |  |                         | 31  |                                                                                            | 
| |                                                     |  |                         |     |                                                                                            | 
| |                                                     |  |                         | 626 |                                                                                            | 
| | Less
  - participation of thegovernment
  of Israel |  |                         | 140 |                                                                                            | 
| |                                                     |  |                         |     |                                                                                            | 
| |                                                     |  | $                       | 486 |                                                                                            | 
| |                                                     |  |                         |     |                                                                                            | 

- 17 -

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MARNETICS BROADBAND TECHNOLOGIES LTD.
(A Development Stage Company)
Notes to the Consolidated Financial Statements

Note 10 - Supplementary statement of operations information(cont.)

|b. | Sales and
  marketing expenses, net
|-- | -----------------------------------

| |                                                      |  | Year ended December 31, |     | Cumulative from
  June 1, 1998(date of
  commencement of
  operations) to
  December 31, | 
| | ---------------------------------------------------- |  | ----------------------- | --- | ---------------------------------------------------------------------------------------- | 
| |                                                      |  |                         |     |                                                                                          | 
| |                                                      |  | 2 0 0 2                 |     | 2 0 0 1                                                                                  | 
| |                                                      |  |                         |     |                                                                                          | 
| | Salaries and related
  expenses                      |  | $                       | 324 |                                                                                          | 
| | Subcontractors                                       |  |                         | 64  |                                                                                          | 
| | Advertising
  and marketing
    Costs                |  |                         | 76  |                                                                                          | 
| |                                                      |  |                         |     |                                                                                          | 
| | Gross sales and marketing
    Costs                  |  |                         | 464 |                                                                                          | 
| |                                                      |  |                         |     |                                                                                          | 
| | Less-participation from
    the Government of Israel |  |                         | -   |                                                                                          | 
| |                                                      |  |                         |     |                                                                                          | 
| |                                                      |  | $                       | 464 |                                                                                          | 
| |                                                      |  |                         |     |                                                                                          | 

|c. | General
  and administrative expenses
|-- | -------------------------------------

| |                                 |  | Year ended December 31, |     | Cumulative from
  June 1, 1998(date of
  commencement
  of operations) to
  December 31, | 
| | ------------------------------- |  | ----------------------- | --- | ---------------------------------------------------------------------------------------- | 
| |                                 |  |                         |     |                                                                                          | 
| |                                 |  | 2 0 0 2                 |     | 2 0 0 1                                                                                  | 
| |                                 |  |                         |     |                                                                                          | 
| | Salaries
  and related expenses |  | $                       | 194 |                                                                                          | 
| | Professional
  services         |  |                         | 291 |                                                                                          | 
| | Management
  fee                |  |                         | 10  |                                                                                          | 
| | Others                          |  |                         | 289 |                                                                                          | 
| |                                 |  |                         |     |                                                                                          | 
| |                                 |  | $                       | 784 |                                                                                          | 
| |                                 |  |                         |     |                                                                                          | 

|d. | Provision
  for a Bank guarantee                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | The Company has provided the Bank with a guarantee of
  up to $716,000, which decreases in the ratio of NIS 1:2 paid on account of
  the outstanding debt of Hod Hasharon, which has been assigned to the Bank
  (Note 3b). To date Hod-Hasharon has not made any re-payment on account of the
  debt, and therefore the guarantee has not decreased. According to the terms
  of the Bank Agreement, following November 30, 2002, the Bank is entitled to
  exercise the outstanding amount of the guarantee, and since the guarantee has
  not decreased, the Company decided to establish an allowance for the
  guarantee in full.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Nevertheless,
  the Company and its representatives are conducting on-going negotiations with
  Hod-Hasharon for the repayment of the
  debt to the Bank, although at present the Company cannot assess what portion
  of the debt will be recovered, if any, (and the guarantee decreased
  accordingly) as a result of such negotiations, or any future action by the
  Company.                                                                                                                                                                                                                                                    

- 18 -

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MARNETICS BROADBAND TECHNOLOGIES LTD.
(A Development Stage Company)
Notes to the Consolidated Financial Statements

Note 11  Impairment of goodwill

In 2001, in view of the markets
decline, the Company assessed the value and future benefit of its enterprise
level goodwill pursuant to Accounting Principles Board Opinion No. 17,
Intangible Assets (APB 17) (see Note 1). The result of the assessment was a
full write-off of the goodwill in the amount of $9,309,000.

- 19 -

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