<PAGE>


                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 20-F

                                   (Mark One)

[  ]     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, 2001.

OR

[  ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE 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 STREET
                              RA'ANANA 43000 ISRAEL
                    ----------------------------------------
                    (Address of principal executive offices)

 Securities registered or to be registered pursuant to Section 12(b) of the Act:

           Title of each                            Name of each exchange
               Class                                 on 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, 2001, 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
        ---               ---


<PAGE>



                                TABLE OF CONTENTS

PART I                                                                 PAGE

Item 1:  Identity of Directors, Senior Management and Advisers..  Not Applicable
Item 2:  Offer Statistics and Expected Timetable................  Not Applicable
Item 3:  Key Information........................................         3
Item 4:  Information on the Company.............................        11
Item 5:  Operating and Financial Review and Prospects...........        19
Item 6:  Directors, Senior Management and Employees.............        25
Item 7:  Major Shareholders and Related Party Transactions......        33
Item 8:  Financial Information..................................        37
Item 9:  The Offer and Listing..................................        38
Item 10: Additional Information.................................        39
Item 11: Quantitative and Qualitative Disclosures about
                  Market Risk...................................         44
Item 12: Description of Securities Other than Equity Securities.  Not Applicable

PART II

Item 13: Defaults, Dividend Arrearages and Delinquencies........  Not Applicable
Item 14: Material Modifications to the Rights of Security
                  Holders and Use of Proceeds...................  Not Applicable
Item 15: [Reserved].............................................        45
Item 16: [Reserved].............................................        45

PART III

Item 17: Financial Statements..................................   Not Applicable
Item 18: Financial Statements..................................         45
Item 19: Exhibits..............................................         45

                  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(TM), Prospera(TM), Prospera Megalink(TM), and Prospera
Expert(TM), 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.



                                       2
<PAGE>


                                     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, 2001 and December 31, 2000 balance sheet includes the consolidated accounts
of the Company and Marnetics.

                    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.







                                       3
<PAGE>




<TABLE>
<CAPTION>
                                                                                                     CUMULATIVE FROM
                                                                                                       JUNE 1, 1998
                                                        YEAR ENDED                  YEAR ENDED             TO
                                                       DECEMBER 31,                DECEMBER 31,      DECEMBER 31, (1)
                                              -----------------------------        ------------      ----------------
                                                 2001               2000               1999               2001
                                              ----------         ----------        ------------      ----------------
                                                                       US$ IN THOUSANDS
<S>                                          <C>                <C>               <C>                 <C>
Research and development costs                       812                252                 33              1,228
Sales and marketing expenses, net                    310                142                 --                452
General and administrative expenses                1,128                722                 44              2,075
Provision of legal claims                            750                 --                 --                750
Impairment of goodwill                             9,309                 --                 --              9,309
Loss allowance on loan to related
   party                                           1,228                 --                 --              1,228
Non-cash compensation expenses                       805              2,408                 --              3,213
                                              ----------         ----------         ----------         ----------

OPERATING LOSS                                   (14,342)            (3,524)               (77)           (18,255)

Financial income, net                                175                167                  9                359
Loss on sale of property and equipment                --                 --                (28)               (28)
Share in losses of affiliate                          --               (639)               (21)              (660)
                                              ----------         ----------         ----------         ----------

LOSS FROM CONTINUING OPERATIONS                  (14,167)            (3,996)              (117)           (18,584)

DISCONTINUED OPERATIONS:
Loss from operations of
electrical  division                                (450)                --                 --               (450)
Loss on sale of electrical division               (2,278)                --                 --             (2,278)
                                              ----------         ----------         ----------         ----------

LOSS FOR THE PERIOD                              (16,895)            (3,996)              (117)           (21,312)
                                              ==========         ==========         ==========         ==========

PER SHARE DATA Basic and diluted:
LOSS PER SHARE FROM CONTINUING
OPERATIONS                                    $    (2.11)        $    (4.15)        $    (0.20)
                                              ----------         ----------         ----------
LOSS FROM DISCONTINUED OPERATIONS             $    (0.40)        $       --         $       --
                                              ----------         ----------         ----------

NET LOSS                                      $    (2.51)        $    (4.15)        $    (0.20)
                                              ==========         ==========         ==========
SHARES USED IN COMPUTING LOSS PER
ORDINARY SHARE
Basic and diluted                              6,725,685            962,553            575,234
                                              ==========         ==========         ==========
</TABLE>

<TABLE>
<CAPTION>
                                                              AT DECEMBER 31,
                                              ------------------------------------------------
BALANCE SHEET DATA                                2001              2000               1999
                                              ----------         ----------         ----------
<S>                                           <C>                <C>                <C>
Working capital ......................             1,596              4,925                282
Total assets .........................             3,507             25,376                418
Short term credits and current
maturities of long-term debt .........                50              3,337                 --
Long-term debt .......................                --                213                 --
Shareholders' equity .................             2,437             18,527                408
</TABLE>

-------------------
(1) Marnetics Ltd. was established and commenced its operations in June 1998


        B.        Not Applicable

        C.        Not Applicable

        D.        RISK FACTORS

                  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
network capacity enhancement and network information analysis solutions for IP
networks (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 (the "ELECTRICAL BUSINESS"), which
was sold during 2001. See "ITEM 8B - SIGNIFICANT CHANGES."



                                       4
<PAGE>

                  RISKS RELATING TO NETWORK BUSINESS

                  TECHNOLOGICAL FACTORS; UNCERTAINTY OF PRODUCT DEVELOPMENT

                  Despite the fact that the Company is in the initial steps of
commercializing its products, 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 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 there is no guarantee that we will have the
necessary funds 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(TM), 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(TM) family of
products. The patent applications are still pending. We intend to file
additional patent applications in Israel and the United States for new
technologies currently under development. 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 AND ACQUISITION STRATEGY

                  General. As part of its operating history and growth merger
and acquisition strategy, the Company seeks to merge with or acquire other
businesses. The Company continually seeks merger and acquisition candidates in
selected and, if possible, synergetic markets and from time to time engages in
exploratory discussions with potential merger and acquisition candidates. There
can be no assurance, however, that the Company will be able to identify and
merge with or acquire targeted businesses or obtain financing for such mergers
or acquisitions on satisfactory terms. Furthermore, there can be no assurance
that competition for merger and acquisition candidates will not escalate,
thereby increasing the costs of making mergers and acquisitions or making
suitable mergers and acquisitions unattainable.

                  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 or
acquired in future acquisitions. Consequently, no assurance can be given that
the Company will be able to make future mergers and acquisitions at favorable
prices, that



                                       5
<PAGE>


merged with or acquired 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 or make
acquisitions. 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 or
acquired 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 or acquired 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 or
acquired businesses. Further, no assurance can be given that the Company will
successfully integrate its recent acquisitions or any other future merged or
acquired 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 or acquisitions 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.

                  Significant Future Charges to Earnings. Future merger and
acquisitions may involve the recording of a significant amount of intangible
assets, particularly goodwill, on the Company's balance sheet, which will be
amortized over varying periods of time.

                  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, expenses, delays, problems, and
difficulties typically encountered in the establishment of a new business,
especially a development stage company

                   Marnetics is in the initial commercialization stage. 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(TM)
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.

                  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.




                                       6
<PAGE>


                  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. 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.

                  PROPOSED EXPANSION

                  The Company intends to pursue a strategy of growth. We have,
however, limited experience in effectuating rapid expansion or in managing
operations that are geographically dispersed. We intend to pursue our growth
strategy by entering into strategic alliances for the marketing of our products
or technology (OEM agreements), hiring and retaining skilled management, as well
as financial, marketing, technical, and other personnel and successfully
managing growth (including monitoring operations and controlling costs and
maintaining effective quality controls). Our prospects could be adversely
affected by unfavorable general economic conditions, including any downturns in
the Israeli or international economies, or a decline in the economic prospects
of particular governmental or commercial customers or segments or targeted
markets, which could result in reduction or deferral of expenditures by
prospective customers. There can be no assurance that we will be able to achieve
significant market acceptance of future products, successfully introduce new
products, or achieve significant penetration in new geographic markets.

                  Our products may require a sophisticated marketing and sales
effort targeted at several levels within a prospective customer's organization.
We have recently expanded our marketing and sales staff and plan to further
increase our staff, including sales, technical and customer support personnel.
Competition for qualified sales personnel is intense and we may not be able to
hire sufficient and skilled sales personnel to support our sales and marketing
efforts.

                  As the Company grows, we will need to increase our staff to
support new customers, as well as our continued research and development
operations. The installation of network traffic management solutions, the
integration of these solutions into existing networks and ongoing support can be
complex. Accordingly, the Company needs highly trained technical and customer
support personnel. Hiring technical and customer support personnel is very
competitive in this industry, due to the limited number of people available with
the necessary technical skills and understanding of our products. This is
particularly true in Israel, where competition for such personnel is intense.
Our success depends upon our ability to attract, train and retain highly
qualified technical and customer support personnel.



                                       7
<PAGE>


                 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 and our cash requirements have historically exceeded and will
likely exceed cash flow from operations. 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.

                  LIMITED MARKETING CAPABILITIES; DEPENDENCE ON THIRD PARTY
                  MARKETING ARRANGEMENTS

                  The Company through Marnetics Ltd. has commenced marketing
activities relating to product commercialization and has limited marketing
experience and limited financial, personnel and other resources to undertake
extensive marketing activities independently. Accordingly, we will rely on
arrangements with third parties for the marketing and distribution of our
products, including arrangements with distributors. There can be no assurance
that we or any third parties will be able to market our products successfully or
that their efforts will result in any significant revenue. The Company could
also be dependent upon such dealers and distributors and other third parties to
provide installation and support services. To the extent that such third parties
provide inadequate services and support, over which we will not have direct
control, our reputation and our ability to continue to sell additional products
through such distributors or dealers would be adversely affected. While we
believe that any independent distributors or other strategic partners with which
it enters into such arrangements will have an economic motivation to sell our
products, the time and resources devoted to these activities generally will be
contributed and controlled by such entities and not by us. A decline in the
financial prospects of particular distributors or other strategic partners or of
any of their customers, could have an adverse effect on the Company. Moreover,
joint ventures or similar arrangements may require financial or other
commitments by us. 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 anticipates having sales in Israel and in
international markets, but there can be no assurance that we will be able to do
so or that such international markets will be viable. To the extent we are able
to expand successfully, it will become increasingly subject to the risks
associated with international sales, including economic and political
instability, shipping delays, customs duties, export quotas, and other trade
restrictions, any of which could have a significant impact on our ability to
deliver products on a competitive and timely basis and exacerbate the risks
inherent in our business. In addition, we may encounter significant difficulties
in connection with the sales of our products in international markets, future
imposition of, or significant increases in, the level of custom duties, export
quotas, or other trade restrictions that may have an adverse effect on us.

                  CURRENCY EXCHANGE RISKS ASSOCIATED WITH INTERNATIONAL SALES

                  It is anticipated that most of our revenues will be derived in
United States dollars, 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. 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.


                                       8
<PAGE>


                  POTENTIAL PRODUCT LIABILITY; WARRANTY EXPENSE

                  Despite the fact that the company performs on routine basis
tests of its products, new products 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.

                   DEPENDENCE ON KEY PERSONNEL

                  The success of the Company will be largely dependent on the
abilities and continued personal efforts of Marnetics Ltd.'s senior management,
particularly those of Menachem Reinschmidt, Founder of Marnetics Ltd. and CEO of
the Company, David Sheetrit, Chief Operating Officer, Ilan Hadar, Chief
Financial Officer, and Hanoch Newman, Vice President of Research and
Development. Although some of the officers have entered into
employment/consulting agreements with the Company, these employment/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

                  We intend to provide 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 June 30, 2002, our Executive Officers and Directors and
principal shareholders beneficially own an aggregate of 68.6% 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. See "ITEM 6A - DIRECTORS AND SENIOR MANAGEMENT" and "ITEM
7-MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS."

                  RISKS RELATING TO COLLECTION OF DEBT BY THE COMPANY

                  Effective March 31, 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 CEO of the Company, all the fixed
assets, inventories, goodwill and other assets and liabilities related to the
electrical operations for a consideration of $597,000. The Company, considering
the collectibility probability, decided to establish an allowance on the amount
not yet collected. There can be no assurance that the Company will collect the
consideration owed to it from the sale.

                  At December 31, 2001 a loan, linked to the Israeli CPI and
bore interest of 2% per annum and is repayable in eight annual installments each
comprised of 1/8 of the principal and the



                                       9
<PAGE>


accrued interest thereon commencing December 31, 2001, was granted, during the
year 1998, to a major shareholder and former director and officer, Mr.
Strikovsky. The Company reassessed the collectibility of the loan, 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. There can be
no assurance that the Company will collect the consideration owed to it from the
loan.

                  During the year 2001, the Company entered into an agreement
with Bank Hapoalim Ltd in respect to the Company's short-term credit borrowed
from the Bank in the amount of $3,127,000. In accordance with the Bank
agreement, the Bank has agreed to release the Company from its obligation and to
cancel the floating charge and liens registered in favor of the Bank on
properties of the Company provided that, the Company shall pay $954,000 to the
Bank on account of the Debt 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 "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.

                  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.
The future effect of this deterioration and violence on the Israeli economy and
our operations is unclear. Ongoing violence between Israel and Palestinians may
have a material adverse effect on our business, financial conditions and results
of operations.

                  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. We
have operated effectively under these requirements since our inception. No
prediction can be made as to the effect on the Company of any expansion of these
obligations.

                  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.


                                       10
<PAGE>


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 State of Israel corporation. 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.

                  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, the Company issued to the Investors 221,200
ordinary shares in consideration of $5,076,000.

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

                  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 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
network capacity enhancement and network information analysis solutions for IP
networks (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 (the "ELECTRICAL BUSINESS"), which
was sold during 2001. See "ITEM 8B - SIGNIFICANT CHANGES."

                  As of April 1, 2001, the Company through Marnetics is engaged
only in the Network Business.




                                       11
<PAGE>




         NETWORK BUSINESS

                  GENERAL

                  The Company's operating subsidiary, Marnetics Ltd., is in the
stage of commercialization of its products developed in the year 2001 until
today. 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(TM) 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 networks management are focusing on
better utilization of existing infrastructure, improvement in performance and
providing value-added service 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, 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.



                                       12
<PAGE>

                  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 can be expensive, especially for
networks with many remote sites and for international networks; and there is no
application performance visibility to enable effective capacity planning.

                  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 hits can 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 - 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(TM) FAMILY OF PRODUCTS

                  Prospera(TM), 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(TM) addresses one of the fundamental problems of communication
networks: capacity and scalability, especially in high-volume traffic
situations. Prospera(TM) solves the problem of mission-critical application
performance on congested IP networks by fortifying and



                                       13
<PAGE>


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(TM) save money by
delaying additional bandwidth purchases, while improving service level and
customer satisfaction.

                   As of today, the Prospera(TM) family of products comprises
two main products:

                  o    The Prospera MegaLink(TM) - 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.

                  o    The Prospera Expert(TM) - A Network Information System
                       that brings a new approach to network performance and
                       capacity monitoring and analysis for service providers
                       and enterprises.

              PROSPERA MEGALINK(TM)

                   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(TM) 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(TM) 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 capacity and mission-critical application 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.

                   In addition, Prospera MegaLink(TM) is software-based and
scalable to large traffic volume, allowing for quick and easy deployment that
does not present the configuration problems seen in many other solutions.

                   The Technology

                   Prospera MegaLink(TM) 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.




                                       14
<PAGE>


                   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(TM) 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.

                   Mission-critical application protection and capacity
enhancement are achieved through the employment of Prospera MegaLink(TM).
Deploying Prospera MegaLink(TM) 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(TM) 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.

                   PROSPERA EXPERT(TM)

                   Prospera Expert(TM) 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(TM) 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(TM) is an advanced Network Information
Systems tool. Traditional network management systems focus on monitoring and
troubleshooting. Prospera Expert(TM) 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(TM) product that
maximizes network infrastructure utilization by increasing the effective
capacity and protection of mission critical applications.

                   Prospera Expert(TM) was created to meet the need of
executives, IT 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(TM) provides
a new level of network insight without the need to understand the underlying
technologies or protocols.

                   NETQA SERVICES

                   During 2002, Marnetics launched a new service to be offered
to its customers. 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(TM), 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.

                   CUSTOMERS AND DISTRIBUTORS

                   Management hopes that the Prospera(TM) family of products and
future development of products will offer increased functionality while reducing
costs and improving performance and total Cost of Network Ownership.
Prospera(TM) family of products is likely to be adapted by three main market
segments: enterprises, Internet related service providers and cellular carriers.
These target audiences will


                                       15
<PAGE>


be reached either through direct contact or, through qualified distributors or,
marketing channels, such as Value-Added Resellers or, System Integrators. The
Company is focusing its initial marketing efforts in the Middle East, United
States, Europe and the Far East.

                  In early July 2001, Marnetics also signed an OEM agreement
with Speedwise Technologies Ltd., a company in which Marnetics Ltd. owns a
13.12% interest as of June 30, 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.

                  In April 2002, Marnetics signed a distribution agreement with
TNN Networks Ltd. to become a non-exclusive distributor of Marnetics products in
Israel.

                  In May 2002, Marnetics signed a distribution agreement with IP
Tech S.A. de C.V. to become a non-exclusive distributor of Marnetics products in
Mexico.

                  During 2002, Marnetics completed tests to its products and
started to install beta sites as well as trial in selected customers.

                  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 13.12% interest as of June 30, 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. Marnetics is negotiating with
Speedwise to alter the terms of the software license agreement.

                  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. 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. We
compete with products of Packeteer, Allot, Expand, 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.

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

                  o    expertise and in-depth knowledge of IP networks
                       structure, networks traffic and infrastructure behavior;

                  o    timeliness of new product introductions;

                  o    ability to integrate easily into the existing network
                       infrastructure;



                                       16
<PAGE>


                  o    ability to ensure end-user productivity and mission
                       critical application performance;

                  o    compatibility with industry standards;

                  o    products that decrease latency and packet loss;

                  o    products that demonstrate short Return on Investment
                       (ROI);

                  o    size and scope of distribution network;

                  o    brand name; and

                  o    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 will
compete indirectly with other network capacity enhancement solutions and other
queuing schemes, although we believe that our new product line will enhance
rather than conflict with these products.

                   Marnetics has sufficient cash to finance the anticipated
costs of development activities of its product line through year-end 2002.

                   The decision to modify the Marnetics' technology road map
following the broadband Internet market decline accordingly did delay the
commercialization of the Company's products and services from what was
previously reported by the Company.

                   RESEARCH AND DEVELOPMENT

                  Our current research and development plan is aimed at
leveraging the Company's current technology and developing the Prospera(TM)
family of product and related products.

                   In May 2002, Marnetics Ltd. submitted an application to
obtain research and development funding in the sum of $250,000 from the Office
of the Chief Scientist, of the Ministry of Industry of Trade, of the State of
Israel ("OCS").

                   There is no certainty that the application will be approved,
and if approved, what conditions the OCS will demand of Marnetics Ltd., and if
this would be acceptable to the Company.

                   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, continuing to introduce the Prospera(TM) line of
products. The Company chose to introduce the product line at CommunicAsia 2002
because it is a large 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 hopes
to make potential distributors aware of its new product line.

                   GROWTH STRATEGY - MERGERS AND ACQUISITIONS

                   As part of its growth strategy, the Company seeks to merge
with or acquire other businesses. The Company is seeking merger and acquisition
candidates in selected markets and from time to time engages in exploratory
discussions with potential merger and acquisition candidates, although it has
not entered into any definitive agreement to do so. There can be no assurance,
however, that the Company will be able to identify and merge with or acquire
targeted businesses or obtain financing for mergers and acquisitions on
satisfactory terms. Furthermore, there can be no assurance that competition for
merger and acquisition candidates will not escalate, thereby increasing the
costs of making mergers and acquisitions or making suitable mergers and
acquisitions unattainable.



                                       17
<PAGE>


                  MARKETING, PROMOTIONAL, AND CONSULTANTS

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

                  In February 2002, Marnetics Ltd. 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.

                  In April 2002, Marnetics Ltd. 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. PortfolioPR has already begun providing services to 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 June 30, 2002:

<TABLE>
<CAPTION>
                  NAME OF
               SIGNIFICANT                                                     PERCENTAGE OF OWNERSHIP INTEREST
          SUBSIDIARY/AFFILIATE                COUNTRY OF INCORPORATION                 AND VOTING (1)

<S>                                           <C>                              <C>

              Marnetics, Ltd.                         Israel                               100%

     Marnetics, Inc. (a subsidiary of
              Marnetics Ltd.)                      Delaware, USA                           100%

      Speedwise Technologies Ltd. (an                 Israel                              13.12%
      affiliate of Marnetics Ltd.)(2)
</TABLE>



                                       18
<PAGE>

      (1)  On fully diluted basis.

      (2)  The Company holds 450,000 Ordinary Shares of Speedwise Technologies
           Ltd.

                  Nulan Technologies, Ltd., an Israeli subsidiary of the
Company, was transferred to the purchaser of the Electrical Business as of March
31, 2001.

        D.        PROPERTY, PLANTS AND EQUIPMENT

                  During the year 2000, our offices were located at a leased
facility in Moshav Batzra, Israel. The facility consisted of a building of
approximately 469 square meters and a parking lot of approximately 543 square
meters. A portion of the building served as the Company's offices and the
remaining portion served as a warehouse for storing tools and inventory. The
rent expense for the facility throughout the year 2000 was approximately $2,175
per month, plus Israeli value added tax.

                  As of December 20, 2000, we relocated our headquarters 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, 2002 and was renewed until April 30, 2003. The rent expense for the facility
is currently approximately US $2,436 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 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
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., and (2) historical business of electrical and
lighting contracting and engineering business or the Electrical Business, which
was sold during 2001

                  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 acquisition of Marnetics by the Company was accounted for
as a reverse acquisition. 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


                                       19
<PAGE>



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, 2001 and December 31, 2000
balance sheet includes the consolidated accounts of the Company and Marnetics.

                  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.

                  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 analysis
solutions.

                  Marnetics has a limited operating history and has sustained
losses since its inception. Marnetics anticipates that both the losses and
negative operating cash flow will continue to increase during the foreseeable
future until Marnetics develops a customer base that will generate sufficient
revenues to fund operating expenses. Since its inception in June 1998, through
December 31, 2001, Marnetics has incurred cumulative losses of $21,312,000 and
cumulative negative operating cash flows of $5,353,000.

                  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").
The result of the assessment was a full write-off of the goodwill in the amount
of $9,309,000.

                  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 former chief executive officer and current major stockholder, Dov
Strikovsky. Mr. Strikovsky was the sole bidder in a public request for
proposals, which was announced on May 15, 2001 and ended on May 30, 2001. The
Board of Directors considered the purchase offer and authorized the Company's
acceptance of the Purchaser's bid.

                  The sale was for 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 Millenium
Investments and Assets Ltd to change the terms of payments to such that the
first 11 installments 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.
As of July, 2002, Idan Millenium Investments and Assets Ltd. paid the first four
installments.

                  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.

                  As of June 30, 2002, Marnetics Ltd. holds 13.12% of the
outstanding shares of Speedwise Technologies Ltd. ("Speedwise"), an Israeli
hi-tech company established in July 1999. The holdings in Speedwise do not
currently impose any obligations on Marnetics. Speedwise is actively seeking
additional funds to enable it to continue its operations through the end of the
year. If such additional funds will not be available for Speedwise or if a
business combination is effected with Speedwise reflecting a lower value for
Speedwise than the carrying amount, some or all of the Company's investment may
not be recoverable. Further, the Company executed on March 24, 2002 an anti
dilution agreement as a result of a proposed investment by an investor which
would significantly dilute the holdings of the Company in Speedwise
Technologies. The investment did not take place. Speedwise is negotiating new
alternatives of fund raising or business combination that could result, if
effected, a significant dilution to Marnetics holding in Speedwise. Marnetics
decided not to participate in the current fund raising made by Speedwise.


                                       20
<PAGE>


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

                   Operating Revenues

                   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.

                   The Company established a provision for legal claims in the
amount of $750,000 to provide for its possible legal exposure. The Company 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, as well
as damages as a result of a breach of this alleged 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 is in the process of filing an
appeal on the court decision. See "ITEM 8A - 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. 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.

                   At December 31, 2001 the Company reassessed the
collectibility of the loan given to Mr. Dov Strikovsky, a major shareholder 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 CEO".

                   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
aggregate unearned stock-based compensation of $60,000. Stock-based compensation
included in operating expenses totaled


                                       21
<PAGE>

$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 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 15%. 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.

                  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 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.



YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

                  Operating Revenues

                  As Marnetics' products were still in the development phase and
had not begun commercialization, Marnetics had no sales in either the years
ending December 31, 1999 or December 31, 2000.

                  Operating Expenses

                  Research and Development expenses consisted primarily of
salaries and related expenses and sub-contractor expenses. Research and
Development expenses increased from $33,000 in the year ending December 31,
1999, to $252,000 in the year ending December 31, 2000. The increase was
primarily due to Marnetics resumption of its research and development activities
after Marnetics obtained equity financing in the first quarter of 2000.

                  Selling and Marketing expenses consisted mostly of salaries
and rose to $142,000 at the end of December 31, 2000, 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 $44,000 in the year ending December 31,
1999, to $722,000 in the year ending December 31, 2000. The increase was
primarily due
                                       22
<PAGE>

to the recruiting and hiring of additional employees and due to increased
professional and consulting fees.

                  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, 2000, Marnetics recorded
an aggregate unearned stock-based compensation of $1,836,000. Stock-based
compensation included in operating expenses totaled $2,408,000 in the year
ending December 31, 2000, compared to no such expenses in the year ended
December 31, 1999.

                  Financial Income

                  Net financial income in the year ending December 31, 1999 and
the year ending December 31, 2000 was $9,000 and $167,000, 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 Affiliates

                  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 15%.
During the years ending December 31, 2000 and December 31, 1999 the Company
followed the equity method and shared in the losses of the affiliate in the
amount of $639,000 and $21,000 respectively.

                  Net Loss

                  Net loss in the year ending December 31, 1999 and the year
ending December 31, 2000 was $117,000 and $3,996,000, 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 $7,298,000. On December 31, 2001, the Company had $2.4
million of cash and cash equivalents compared to $6.5 million at December 31,
2000. The decrease is mostly due to cash used to finance the operation
activities in the amount of $4.1 million. As of December 31, 2001, the Company
had no significant bank credit lines and is financing its activity based only on
equity resources.

                  The Company's capital requirements have been, and will
continue to be, significant and its cash requirements could exceed cash flow
from operations. As a result, the Company may become dependent on bank credit
lines and sales of its securities to fund its development and activities.

                  Net cash used in operating activities in 1999, 2000, and 2001
was $124,000, $872,000, and $4,120,000, respectively. Since the Company has not
generated any 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, 2001 a working capital of
$1,596,000, compared to a working capital of $4,925,000 as of December 31, 2000.

                  The Company's cash and cash equivalents are generally held in
short term bank deposits.

                                       23
<PAGE>

                  During the year 2001 the Company entered into an agreement
with Bank Hapoalim Ltd in respect to the Company's short-term credit borrowed
from the Bank in the amount of $3,127,000. In accordance with the Bank
agreement, the Bank has agreed to release the Company from its obligation and to
cancel the floating charge and liens registered in favor of the Bank on
properties of the Company provided that, the Company shall pay $954,000 to the
Bank on account of the Debt 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. See "ITEM 7B -
ASSIGNMENT OF BANK DEBT".

                  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. See "ITEM 3D - RISK FACTORS - RISKS RELATING TO COLLECTION OF DEBT BY
THE COMPANY".

         C.       RESEARCH AND DEVELOPMENT

                  As the Company is in the stage of commercialization of
products developed in years 2001 and 2002, it anticipates that a significant
amount of its operating expenses will be expended in the area of research and
development. Research and Development expenses increased from $33,000 in the
year ending December 31, 1999, to $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 Marnetics expansion of its research and development activities, hiring
additional staff, and purchase of equipment and software.

                  The main targets of the research and development department
for the year 2002 are to commercialize new versions of the Prospera(TM) platform
and to develop additional network related solutions.

                  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 of Trade, of the State of
Israel ("OCS") for development of products for the Prospera(TM) platform. There
is no certainty that the application will be approved, and if approved, what
conditions the OCS will demand of Marnetics Ltd. and if this would be acceptable
to management.

         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 us to be successful, our potential customers
must recognize the value of our new approach to bandwidth management solutions,
and decide to invest in the management of their networks and 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 July 2001, the Financial Accounting Standards Board
("FASB") issued statement of Financial Accounting Standards No. 141 ("SFAS
141"), Business Combinations." SFAS 141 requires the purchase method of
accounting for business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interests method. The Company does not believe that
the adoption of SFAS 141 will have a significant impact on its financial
statements.

                  In July 2001, the FASB issued Statement of Financial
Accounting Standards No. 142 ("SFAS 142"), Goodwill and Other Intangible
Assets", which is effective January 1, 2002. SFAS 142 requires, among other
things, the discontinuance of goodwill amortization. In addition, the standard
includes provisions for the reclassification of certain existing recognized
intangibles as goodwill, reassessment of the useful lives of existing recognized
intangibles, reclassification of certain intangibles out of previously reported
goodwill and the identification of reporting units for transitional goodwill



                                       24
<PAGE>

impairment test six months from the date of adoption. The Company does not
believe that the adoption of SFAS 142 will have a significant impact on its
financial statements.

                  In June 2001, the FASB issued Statement of Financial
Accounting Standards No. 143, "Accounting for Asset Retirement Obligations"
("FAS 143"), which is effective for years beginning after June 15, 2002, which
will be the Company's fiscal year 2003. FAS 143 addresses legal obligations
associated with the retirement of tangible long-lived assets that result from
the acquisition, construction, development or normal operation of a long-lived
asset. The standard requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. Any associated asset retirement
costs are to be capitalized as part of the carrying amount of the long-lived
asset and expensed over the life of the asset. The Company does not believe that
the adoption of SFAS 143 will have a significant impact on its financial
statements.

                  In August 2001, the FASB issued Statement of Financial
Accounting Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (FAS 144), which addresses financial accounting and reporting
for the impairment or disposal of long-lived assets and supersedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of, and the accounting and reporting provisions of APB Opinion No.
30, Reporting the Results of Operations, for a disposal of a segment of a
business. FAS 144 is effective for fiscal years beginning after December 15,
2001, with earlier application encouraged. The Company has not yet determined
what the effect of FAS 144 will be on the earnings and financial position of the
Company.

ITEM 6.           DIRECTORS, SENIOR MANAGERS AND EMPLOYEES

         A.       DIRECTORS AND SENIOR MANAGEMENT

                  The following is list of our directors and senior management,
as of June 30, 2002, followed by a description of their business background:

             NAME              AGE    POSITION*
             ----              ---    ---------
Moshe Kessner...................52    Director
Pekka Roine.....................57    Director
Moshe Rubin.....................50    External Director
Yossi Shelly....................44    External Director
Menachem Reinschmidt............42    Director, CEO
Joshua Piasetzky................54    Director
David Sheetrit..................40    Chief Operating Officer
Ilan Hadar......................37    Chief Financial Officer
Hanoch Newman...................37    Vice President - Research and Development
Todd Kedes......................36    Regional Sales and Marketing Director
Ofer Chermesh...................36    Regional Sales and Marketing Director

* 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. Since the resignation of Mr. Ben-Gur, the Company does not have a
  permanent Chairman of the Board.

                  MOSHE KESSNER, Director of the Company since December 2001,
and a Director of Marnetics Ltd. since July 2002. Mr. Kessner is VP Technology
of Kardan Communication Ltd. a company investing in the area of
telecommunications. Prior to joining Kardan Communications, Mr. Kessner was
Associate Vice President Business Development, ECI Telecom Ltd. (NASDAQ: ECIL),
a telecom equipment vendor, which holds a 12.84% stake in the Company. In this
capacity, he was involved in the investment strategy and investment companies of
ECI Telecom. Prior to joining ECI in 1999, Mr. Kessner was Vice President
Technology and Business Development of Tadiran Telecommunications Ltd. He served
as Lieutenant Colonel in the Israel Defense Forces as Chief Research Engineer in
the Signal Corp, involved in developing the computer security standards and

                                       25
<PAGE>

several strategic and tactical communication systems. He learned the courses
needed for a M.Sc. in Computer Science and holds a B.Sc. in Electrical
Engineering.

                  PEKKA ROINE, Director of the Company and Director of Marnetics
Ltd. since July 2002, joined Prime Technology Ventures in 1999 as a General
Partner. Pekka has served as chairman or director of numerous technology
companies, including Solid, VistaCom, Metorex, AudioSoft, Buscom, Idesco, and
Tunturi. He is also a founder of the Health On the Net foundation. Previously,
Pekka held senior executive positions at Digital Equipment Corporation for 22
years including General Manager Finland, and he was the corporate director
worldwide for the Travel and Transportation Industry. He holds an M.Sc and a
B.Sc in Physics from the University of Helsinki in Finland. He is also a
graduate of the Stanford Executive Program.

                  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 sold used cars, car parts and accessories, as well as
worked in car maintenance.

                  YOSSI SHELLY, External Director of the Company since 1999, is
Managing Director of S. Alexander Ltd. Investment & Consulting firm, based in
Beer-Sheva, Israel. During Mr. Shelly's career, he has served on many boards of
directors of corporations and organizations. For nearly a decade, he held
various posts within the Municipality of Beer-Sheva as well as being Chairman,
and is currently acting COB of the Israeli Postal Authority. Prior to his career
in management and consulting, Mr. Shelly served in the Israel Defense Forces for
17 years, dedicating most of his service as the commander of the Computerized
Recruitment Center and concluding his service as a Personnel Officer in the
Armored Corps. He retired as a Major. He holds a B.Sc. in Industrial Engineering
and Management and is currently studying for a degree in law.

                  MENACHEM REINSCHMIDT, Director of the Company since 2001,
Director of Marnetics Ltd., and Director of Marnetics, Inc, is currently Chief
Executive Officer of the Company and currently oversees all technology
development activities of the Company. 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 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, 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.

                  JOSHUA PIASETZKY, Director of the Company since 2001 and a
Director of Marnetics Ltd. since July 2002, is Senior Vice President and Chief
Technical Officer of ECI Telecom Ltd. (NASDAQ: ECIL), a telecom equipment
vendor, which holds a 12.84% stake in the Company. He is also a director in
several of the subsidiaries of ECI Telecom Ltd. and co-founder of AxONLink.
Joshua has been one of the key contributors to the growth and success of ECI
Telecom - from annual sales of about 2M$ when he joined the company in 1975, to
over 1B$ at present. He conceived several of ECI Telecom's most successful
products. Joshua has actively participated in several ITU and ETSI Committees.
He is also one of the founders and the chairman of the Broadband MAGNET
Consortium in Israel, which developed various advanced technologies, in the area
of broadband telecommunications. Joshua holds a B.Sc. and M.Sc. degree in
Electrical Engineering from the Technion - Israel Institute of Technology -
Haifa. He is also an Israel Patent Attorney and a number of United States,
European and Israeli patents are registered in his name. In 1982, Joshua won the
Rothschild Prize for Innovation and Export.

                  DAVID SHEETRIT, Chief Operating Officer, has served as the
Company's Acting Chief Executive Officer and Chief Operating Officer during
2001, and also served as Director of 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 is comprised of 3,000 students and 200 faculty
and staff. Mr. Sheetrit has lectured at various


                                       26
<PAGE>

colleges and academies and served as an independent organizational and business
consultant to various organizations and institutions.

                  ILAN HADAR, Chief Financial Officer of the Company and serves
as Director of Marnetics, Inc. 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 CFO 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. 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.

                  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. He holds a B.A. in Computer Sciences.

                   TODD KEDES, Regional Sales and Marketing Director. Mr. Kedes
joined the Company in May 2002 brings to Marnetics an experienced international
business development, marketing and sales background combining over twelve years
diverse and progressive responsibilities in hi-tech datacom, telecom, hardware
and software products and services, as well as consumer products. Prior to
Marnetics, Mr. Kedes worked with Tel Aviv-based Magna Capital, a
management-consulting group, where he played key roles in myriad international
business development projects for clients such as Tnuva, Rabintex and Shrem
Fudim Kellner. Mr. Kedes also provided independent marketing and sales
consulting services to Nicosia Cyprus-based Net Planet Earth, a satellite
backbone service provider. Prior to Magna Capital and independent management
consulting, Mr. Kedes successfully pursued a hi-tech career in Israel,
including: most recently, Director of Sales at Harmonic Data Systems for EMEA
territories; International Sales Manager at Comverse Network Systems (later
known as StarHome); Tegrity, as Regional Sales Manager; and, Executive Marketing
Director at Geo Interactive Media Group, Ltd. (later known as Emblaze). Prior to
Israel, Mr. Kedes ran his own business, TRGA, as President and Founder,
importing and distributing consumer products from China, Italy and France and
distributing them to retailers and wholesale distributors in Southern California
and Nevada. Mr. Kedes holds an MSBA (Dean's List) - 1993 - and MBA (Dean's List)
- 1992 - in International Marketing, Operations Management and Venture
Management from the University of Southern California and a BA - 1988 - in
General and Cultural Anthropology from the University of Pennsylvania. Mr. Kedes
is business-level proficient in five languages.


                  OFER CHERMESH, Regional Sales and Marketing Director. Mr.
Chermesh joined the Company in April 2002, and has over 10 years of experience
in Sales, Marketing and Business Development. In his previous position Mr.
Chermesh was part of Comverse's Advanced Solution Group (ASG), where he was
responsible for selling new Comverse products to existing and potential new
customers. Prior to Comverse, Mr. Chermesh was a co-founder of an Israeli-start
up company, where he played a key managerial role and was responsible for
overall Sales, Marketing & Business Development activities. Mr. Chermesh holds a
B.A. in Statistics from Haifa University in Israel.

                                       27
<PAGE>


                  TERM AND RIGHTS TO DESIGNATE BOARD MEMBERS

                  The Articles of Association of the Company provide that each
director is elected for a period of one year at the Company's annual meeting of
shareholders 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. Certain shareholders and
option-holders of the Company the right to nominate and, pursuant to shareholder
agreements, have elected their designees for the Company's Board of Directors.

                  Until November 25, 2001, ISG Solid Capital Markets, LLC, the
representative of several investors in our initial public offering, had the
right, at its option, to designate one director to the Board of Directors, which
director will be reasonably acceptable to the Board of Directors. The Company
had agreed to pay such director or non-voting advisor an attendance fee of
$1,500 per meeting of the Board of Directors. There currently is no such
designated member of the Board and accordingly the right has expired.

                  The former Marnetics Subsidiary shareholders agreed that they
will vote in favor of certain nominees for Director of the Company as follows:
(i) two nominees designated by ECI Telecommunications Ltd., (ii) one nominee
designated by STI Ventures Investments No. 2 B.V. and (iii) one nominee
designated collectively by Prime Technology Ventures NV, Docor International BV
and Ronchal Investments NV. To date, STI Ventures Investments No. 2 B.V. has not
yet designated a nominee for the Company's board and ECI has only designated one
director nominee.

                     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 external 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.

                  Our two external directors Messrs. Rubin and Shelly were
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 the external directors of
the Company shall remain in office until 2004.

                                       28
<PAGE>
                   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.

                   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:

                   o    a breach of his duty of care to the Company or to
                        another person;

                   o    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

                   o    a financial liability imposed upon him in favor of
                        another person.

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

                   o    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

                   o    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:

                   o    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;

                   o    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;

                   o    any act or omission done with the intent to derive an
                        illegal personal benefit; or

                   o    any fine levied against the office holder.

                                       29
<PAGE>

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

     o    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

     o    A provision authorizing the Company to retroactively indemnify an
          office holder.

                  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:

     o    breach of duty of care by any office holder owed to the Company or any
          other person;

     o    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

     o    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 September 14,
2001, the Company has entered into an indemnification agreement with the
officers and directors of the Company as of December 2001 and intends to enter
into an agreement with each new director, subject to shareholder approval. 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


                                       30
<PAGE>

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 $3,000 and per meeting attendance fee of US $185. Every two telephone
conference calls are considered one meeting. Mr. Yossi Shelly also receives
travel expenses of fifty cents per kilometer. The Company intends to grant Mr.
Moshe Kessner, who is a member of the board of directors of the Company and in
light of his services to the Company, options to purchase 36,000 Ordinary Shares
of the Company, which shall vest over a period of 12 months from the date of his
nomination.

         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.

                  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 Yossi
Shelly, Chairman, Moshe Rubin and Pekka Roine. 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

                  In order 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: 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 members but are advisory in nature to the management of the Company.

         D.       EMPLOYEES

                  As of June 30, 2002, the Company employed approximately 14
persons full-time and 2 persons part-time.

                                       31
<PAGE>

                  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 a "Keren
Hishtalmut" saving 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 Mivtahim and Managers' Insurance
Policies.

                  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
approximately 30%.

                  As of June 30, 2002, the Company had no outstanding loans to
employees and officers of the Company except to Mr. Dov Strikovsky, the 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 June 30, 2002, 397,208
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 453,222 options that are unallocated.

                                       32
<PAGE>

ITEM 7.           MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

         A.       MAJOR SHAREHOLDERS

                  The following table identifies, as of June 30, 2002, 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 OF
BENEFICIAL OWNER                                  NUMBER          PERCENT(1)
----------------                                  ------          ----------
Linkware Ltd..................................   1,740,575(2)       18.82%
3 Hadror Street
P.O. Box 73
Hod Hasharon 45100 Israel

Dov Strikovsky................................   1,015,714(3)       10.98%
83 Akiva Street
Ra'anana, Israel

ECI Telecommunications Ltd....................   1,187,439(4)       12.84%
34 Hasivim Street
Kiryat Aryeh Industrial Park
Petach Tikva Israel

STI Ventures Investments No. 2 B.V............   1,180,907          12.77%
Hullenbergweg 379
1101 Cr. Amsterdam
Zuide - Oost
The Netherlands

Prime Technology Ventures NV..................     630,550           6.82%
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 June 30, 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 453,222 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 580,000 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.

                                       33
<PAGE>

(4)      Does not include 567,500 shares that could have been acquired pursuant
         to an option with an exercise price of $2.992 per share that expired on
         August 30, 2001. There was no extension to the option.

                  As of June 30, 2002, 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 June 30, 2002, 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.

                  During 2001, 1,084,500 options granted to Marnetics certain
shareholder were expired unexercised. According to the agreement such options
have to be divided between the formers shareholder of Marnetics. The Company
issued without consideration 955,057 shares and 129,433 options that were
divided according to the agreement.

         B.       RELATED PARTY TRANSACTIONS

                  SALE OF ELECTRICAL BUSINESS

                  Effective March 2001 the Company sold to Idan Millenium
Investments and Assets Ltd., a company under the control of Mr. 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 Millenium Investments and Assets Ltd 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. In addition,
the Purchaser has also assumed approximately $715,000 of liabilities related to
the Electrical Business. The Company, considering the collectibility
probability, decided to establish an allowance on the amount not yet collected.
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 13.12% 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 13.12% of
its outstanding shares. See "ITEM 4B - CUSTOMERS." The OEM agreement was
cancelled in November 2001.

                  NETLOGIC LTD.

                  In February 2002, Marnetics Ltd. entered into a services
agreement with Netlogic Ltd., a company under the control of Menachem
Reinschmidt, Director and CEO 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.

                                       34
<PAGE>

                  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 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. Until May 31, 2002, the Bank
committed not to claim the guaranty from the Company, but if legal procedures to
collect the debt from the municipality of Hod Hasharon were to begin, the Bank
has committed not to claim the guarantee from the Company until November 30,
2002.

                  The Company will have to assess the financial impact on its
financial statements in case the payment will not be done on time by the
municipality of Hod Hasharon.

                  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:

                                       35
<PAGE>
                   o    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

                   o    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.

                   o    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, under its former name, and Mr. Dov Strikovsky
were named as co-defendants 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 as well as damages as a result of a breach of the
agreement. The Company did not appear or defend the law suit because it did not
receive notice of its commencement or any of the subsequent proceedings. On July
2, 2001, due to the fact that no defense and/or reply were provided by the
co-defendants, judgment was entered against the Company and Mr. Dov 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 the appropriate papers to bring an appeal to the rejection of the
motion to vacate the judgment. These papers will be filed on or before July 8,
2002. It is expected that decision on the appeal will be issued by the court in
or about October 2002. On December 5, 2001, Mr. Dov Strikovsky gave an
undertaking to indemnify the Company for all legal fees, expenses and court
costs arising out or in connection with this claim. The Company has established
an allowance in the amount of $750,000 to provide for its possible exposure.

                  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 started to repay
to the Company the amount of such excess advances.

                   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


                                       36
<PAGE>

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.

                  Mr. Strikovsky did not make further payments towards this
loan. The Company notified Mr. Strikovsky of its default and is considering its
future legal actions.

                  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.       Not Applicable

ITEM 8.           FINANCIAL INFORMATION

         A.       FINANCIAL INFORMATION

                  See "ITEM 18-FINANCIAL STATEMENTS".

                  LEGAL PROCEEDINGS

                  1. The Company, under its previous name, and Mr. Dov
Strikovsky were named as co-defendants 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 as well as damages as a result of a breach
of the alleged agreement. The Company did not appear or defend the law suit
because it did not receive notice of its commencement or any of the subsequent
proceedings. On July 2, 2001, due to the fact that no defense and/or reply were
provided by the co-defendants, judgment was entered, by the Supreme Court of the
State of New York, against the Company and Mr. Dov 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 the
appropriate papers to bring an appeal to the rejection of the motion to vacate
the judgment. These papers will be filed on or before July 8, 2002. It is
expected that decision on the appeal will be issued by the court in or about
October 2002. On December 5, 2001, Mr. Dov Strikovsky gave an undertaking to
indemnify the Company for all legal fees, expenses and court costs arising out
or in connection with this claim. The Company has established an allowance in
the amount of $750,000 to provide for its possible exposure. During June 2002
the plaintiff filed a request of enforcement with the District Court of Tel
Aviv, Israel, asking to enforce the judgment against the Company and Mr. Dov
Strikovsky in the amount of $725,000 in Israel.

                  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 ITEM 7 - 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 negotiation 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 guaranty 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


                                       37
<PAGE>

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.

                  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

                  SALE OF ELECTRICAL BUSINESS

                  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 former chief executive officer and current major stockholder, Dov
Strikovsky. Mr. Strikovsky was the sole bidder in a public request for proposals
that was announced on May 15, 2001 and ended on May 30, 2001. The Board of
Directors considered the purchase offer and authorized the Company's acceptance
of the Purchaser's bid.

                  The sale was for 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 Millenium
Investments and Assets Ltd 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.
The first four installments were paid.

                  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.

ITEM 9.           THE OFFER AND 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
American Stock Exchange.

                                       38
<PAGE>

                                                       ORDINARY SHARES
                                                        TRADING PRICES
                                                    ---------------------
                                                      HIGH         LOW
                                                    ---------   ---------
1998
  Fourth Quarter (from November, 25, 1998).......   US $6.125   US $4.875

1999
  First Quarter .................................       5.250       4.000
  Second Quarter ................................       4.125       1.750
  Third Quarter .................................       2.500       1.500
  Fourth Quarter ................................       3.500       1.33

2000
  First Quarter .................................      24.750       2.500
  Second Quarter ................................      15.750       6.750
  Third Quarter .................................      17.500      14.063
  Fourth Quarter ................................      14.500       6.313

2001
  First Quarter .................................       7.250       4.200
  Second Quarter ................................       4.600       1.100
  Third Quarter .................................       2.200        .300
  Fourth Quarter.................................        .900        .350

2002
  First Quarter..................................        .890        .300
  Second Quarter ................................        .440        .200

         B.       Not applicable

         C.       MARKETS

                  The Company's Ordinary Shares are quoted on the American Stock
Exchange under the symbol "MXB." The Company has no present intention to list or
quote its securities on any markets outside of the United States. However, the
Company may seek such listings in the future if its Board of Directors
determines that it is in the best interest of the Company.

                  Possibility of De-Listing

                  At present, the Company may not be in compliance with certain
continued listing standards required by the American Stock Exchange, although no
assertion has been made by the American Stock Exchange as such, nor has the
American Stock Exchange contacted the Company whatsoever about any de-listing.
Any such de-listing of the shares would result in a possible absence of a liquid
trading market for the Company's Ordinary Shares.

         D.       Not applicable

         E.       Not applicable

ITEM 10.          ADDITIONAL INFORMATION

         A.       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 September 14, 2001 the shareholders of the Company amended
Article 29 of the Articles of Association of the Company regarding the timeframe
for the fixing of the record date by
                                       39
<PAGE>

the Board of Directors to at least four (4) but not more than forty (40) days
prior to a shareholders meeting, or such other timeframe, as allowed by the
Regulations under Companies Law (Allowances from Public Companies Whose Shares
are Listed for Trade Outside of Israel) - 2000 (the "Regulations") there under
or its successor statute. 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.

                  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 30, 2002. 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.

                                       40
<PAGE>

                  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.

                  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.

                  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.

                                       41
<PAGE>

         C.       MATERIAL CONTRACTS

                  Software license agreement by and between Marnetics Ltd. and
Speedwise Technologies Ltd. dated as of April 17, 2001. See "ITEM 4B - BUSINESS
OVERVIEW - LICENSING ARRANGEMENTS."

                  Indemnification agreement between Dov Strikovsky, the Company
and the former shareholders of Marnetics Ltd. dated as of June 30, 2001. See
"ITEM 7B - MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS - RELATED PARTY
TRANSACTIONS - INDEMNIFICATION BY SIGNIFICANT SHAREHOLDER."

                  Services agreement with Netlogic Ltd., a company under the
control of Mr. Menachem Reinschmidt, Director and CEO of the Company, dated
February 11, 2002. See "ITEM 7B - MAJOR SHAREHOLDERS AND RELATED PARTY
TRANSACTIONS - RELATED PARTY TRANSACTIONS."

                  Asset purchase agreement between the Company and Idan
Millennium Investments and Assets dated as of June 10, 2001 (Effective March 31,
2001). See "ITEM 8B - SIGNIFICANT CHANGES - SALE OF ELECTRICAL BUSINESS."

                  Amendment to the asset purchase agreement between the Company
and Idan Millennium Investments and Assets dated as of May 6, 2002. See "ITEM 8B
- SIGNIFICANT CHANGES - SALE OF ELECTRICAL BUSINESS."

                  Agreements to the assignment of debt by and among the Company,
Bank Hapoalim Ltd. and Shlavor Systems Ltd. dated as of May 9, 2001. See "ITEM
7B - MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS - RELATED PARTY
TRANSACTIONS - ASSIGNMENT OF BANK DEBT."

         D.       CURRENCY EXCHANGE CONTROLS

                  The Israeli Currency Control Law, 1978, imposes certain
limitations concerning foreign currency transactions and transactions between
Israeli and non-Israeli residents, which limitations may be regulated or waived
by the Controller of Foreign Exchange at the Bank of Israel, through "general"
and "special" permits. In May 1998, a new "general permit" was issued pursuant
to which substantially all transactions in foreign currency are permitted. Any
dividends or other distributions paid in respect of Ordinary Shares and any
amounts payable upon the dissolution, liquidation or winding up of our affairs,
as well as the proceeds of any sale in Israel of our securities to an Israeli
resident are freely repatriable into non-Israeli currencies at the rate of
exchange prevailing at the time of conversion, provided that Israeli income tax
has been paid on (or withheld from) such payments.

                  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.

         E.       TAXATION

                  ISRAELI TAXATION

                  The following is a short summary of certain Israeli tax
consequences to persons holding our ordinary shares. The discussion is not
intended and should not be construed as legal or professional tax advice and is
not exhaustive of all possible tax considerations.

                  Nonresidents of Israel are subject to income tax on income
accrued or derived from sources in Israel or received in Israel. These sources
of income include passive income such as dividends, royalties and interest, as
well as non-passive income from services rendered in Israel. The Company is
required to withhold income tax at the rate of 25% (15% for dividends generated
by an Approved Enterprise) on all distributions of dividends other than bonus
shares (stock dividends), unless a different rate is provided in a treaty
between Israel and the shareholder's country of residence. Under the income tax
treaty between the United States and Israel (the "Treaty"), the maximum tax on
dividends paid to a holder of ordinary shares who is a U.S. resident (as defined
in the Treaty) is 25%.

                                       42
<PAGE>

                  Israeli law imposes a capital gains tax on the sale of
securities and other capital assets. Under current law, however, gains from
sales of the ordinary shares of the Company are exempt from Israeli capital
gains tax for so long as (i) the shares are quoted on Nasdaq or listed on a
stock exchange recognized by the Israeli Ministry of Finance and (ii) the
Company qualifies as an Industrial Company or Industrial Holding Company under
the Law for Encouragement of Industry (Taxes), 1969. In addition, under the
Treaty, a holder of ordinary shares who is a U.S. resident will be exempt from
Israeli capital gains tax on the sale, exchange or other disposition of such
ordinary shares unless such holder owns, directly or indirectly, 10% or more of
the voting power of the Israeli tax consequences to persons purchasing or
holding Ordinary Shares. To the extent that the discussion is based on new tax
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 authorities in question. The discussion
is not intended, and should not be construed, as legal or professional tax
advice and is not exhaustive of all possible tax considerations.

                  Prospective purchasers and holders of Ordinary Shares should
consult their own tax advisors as to the U.S., Israeli, or other tax
consequences of the purchase, ownership, and disposition of the Ordinary Shares,
including, in particular, the effect of any foreign, state, or local taxes.

                           GENERAL CORPORATE TAX STRUCTURE

                  Currently, the regular rate of corporate tax to which Israeli
companies are subject is 36%.

                           TAXATION UNDER INFLATIONARY CONDITIONS

                  The Income Tax (Inflationary Adjustments) Law, 1985 (the
"INFLATIONARY ADJUSTMENTS LAW"), was designed to neutralize the erosion of
capital investments in business and to prevent tax benefits resulting from
deduction of inflationary expenses. This law applies a supplementary set of
inflationary adjustments to the normal taxable profits computed under regular
historical cost principles.

                  The Inflationary Adjustments Law introduced a special tax
adjustment for the preservation of equity based on changes in the Israeli
consumer price index, whereby certain corporate assets are classified broadly
into fixed (inflation-resistant) assets and non-fixed assets. Where a
corporation's equity (as defined in the Inflationary Adjustments Law) exceeds
the depreciated cost of fixed assets, a tax deduction that takes into account
the effect of the annual rate of inflation on such excess is allowed (up to a
ceiling of 70% of taxable income for companies in any single year, with the
unused portion carried forward on a linked basis, without limit). For income
derived from state bonds or funds invested above 75% in state bonds, such
ceiling is not used (100% is deducted). If the depreciated cost of fixed assets
exceeds shareholders' equity, then such excess, multiplied by the annual
inflation rate, is added to taxable income.

                           CAPITAL GAINS TAX

                  Israeli law imposes a capital gains tax on the sale of capital
assets by both residents and non-residents of Israel. The gains generated by an
Israeli company, which is subject to the Inflationary Adjustments Law on the
disposition of securities, will be taxed according to the provisions of such
Law.

                  Pursuant to the Convention Between the Government of the
United States of America and the Government of Israel with Respect to Taxes on
Income (the "U.S.-ISRAEL TAX TREATY"), the sale, exchange or disposition of
Ordinary Shares or redeemable warrants by a person who qualifies as a resident
of the United States within the meaning of the U.S.-Israel Tax Treaty and who is
entitled to claim the benefits afforded to such resident by the U.S.-Israel Tax
Treaty ("TREATY U.S. RESIDENT") will not be subject to the Israeli capital gains
tax unless such Treaty U.S. 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. A sale, exchange or
disposition of Ordinary Shares or redeemable warrants by a Treaty U.S. 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; however, under the U.S.-Israel Tax Treaty, such Treaty U.S.
Resident would be


                                       43
<PAGE>

permitted to claim a credit for such taxes against the U.S. income tax imposed
with respect to such sale, exchange or disposition, subject to the limitations
applicable to foreign tax credits.

                    TAXATION OF NON-RESIDENTS

                  Non-residents of Israel are subject to income tax on income
derived from sources in Israel. On distributions of dividends other than bonus
shares (stock dividends), income tax at the rate of 25% is withheld at source,
unless a different rate is provided in a treaty between Israel and the
shareholder's country of residence. The U.S.-Israel Tax Treaty provides for a
maximum tax of 25% on dividends paid to a Treaty U.S. Resident, and for a rate
of 12.5% on dividends paid to a United States corporation that holds 10% or more
of the shares of the Israeli company.

                    PROPOSED TAX REFORM

                  On June 12, 2002, the recommendations of a tax reform
committee (the "Rabinovich Committee") were published. The Government of Israel
decided in a meeting on June 16, 2002 to adopt the recommendations of the
Rabinovich Committee. The Israeli Ministry of Finance announced its intentions
to bring the recommendations for approval by the Israeli Parliament by the end
of July 2002. The recommendations deal with a number of subjects: reduction of
the direct tax rate of individual income, tax on the capital markets, tax on
income from outside Israel, cancellation of exemptions and encouragement of
business and technology entrepreneurship. We cannot be certain whether the
proposed reform will be adopted, when it will be adopted or what form any reform
will ultimately take.

         F.       Not applicable

         G.       Not applicable

         H.       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.

         I.       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.

                  Interest Rate Risk. At December 31, 2001, the Company had cash
and cash equivalents in the aggregate amount of $2.4 million, 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, 2001, 93% of
the cash and cash equivalent were deposits denominated in NIS and linked to the
US dollar exchange rate. Only 15% of the Company's current assets were cash
deposits denominated in NIS in the aggregate amount of $0.4


                                       44
<PAGE>

million. 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 primarily of cash and cash equivalents and accounts
payable. In view of their nature, the fair value of the financial instruments
included in the Company's working capital is usually identical or close to their
carrying amount.

ITEM 12.          DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

                  Not applicable.

                                     PART II

ITEM 13.          DEFAULTS, DIVIDEND ARREARAGE AND DELINQUENCIES

                  Not applicable

ITEM 14.          MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
                  AND USE OF PROCEEDS

                  Not applicable

ITEM 15.

                  [RESERVED]

ITEM 16.

                  [RESERVED]

                                    PART III

ITEM 17.          FINANCIAL STATEMENTS.

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

ITEM 18.          FINANCIAL STATEMENTS.

                  The Consolidated Financial Statements and related notes
required by this item are contained on pages F-1 through F-18.

<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS                                       Page
------------------------------------------                                   ------------
<S>                                                                          <C>
Report of Independent Public Accountants...................................  F-2
Consolidated Balance Sheets as of December 31, 2001 and 2000...............  F-3
Consolidated Statements of Operations or the years ended
  December 31, 2001, 2000 and 1999 and for the cumulative period from
  June 1, 1998 to December 31, 2001........................................  F-4
Statements of Changes in Shareholders' Equity for the years ended
  December 31, 2001, 2000 and 1999.........................................  F-5
Statements of Consolidated Cash Flows
  for the years ended December 31, 2001, 2000 and 1999
  and for the cumulative period from June 1, 1998 to December 31, 2001.....  F-6 to F-8
Notes to the Financial Statements .........................................  F-9 to F-18
</TABLE>


                                       45
<PAGE>

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 September
                  14, 2001 reflected in amended wording to Article 29).

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 CEO of the
                  Company, dated February 11, 2002.

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 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).

10.5              Indemnification agreement between Dov Strikovsky, 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 Assets Ltd. 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 Assets Ltd. dated as of
                  May 6, 2002.

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              OEM agreement by and between Marnetics Ltd. and Speedwise
                  Technologies Ltd. dated as of July 8, 2001 (incorporated by
                  reference to Exhibit 10.10 to the Company's annual report on
                  Form 20-F for year ended December 31, 2000).





                                       46
<PAGE>





                                   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: /s/ Menachem Reinschmidt
                                           -------------------------------------
                                           Menachem Reinschmidt, CEO

                                       By: /s/ Ilan Hadar
                                           -------------------------------------
                                           Ilan Hadar, CFO

Date:  July 11, 2002





                                       47
<PAGE>













                      MARNETICS BROADBAND TECHNOLOGIES LTD.
                          (A DEVELOPMENT STAGE COMPANY)

                        CONSOLIDATED FINANCIAL STATEMENTS


                                DECEMBER 31, 2001



<PAGE>


                      MARNETICS BROADBAND TECHNOLOGIES LTD.

                        CONSOLIDATED FINANCIAL STATEMENTS



                                    CONTENTS

                                                                            Page

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS                                      2

   CONSOLIDATED BALANCE SHEETS
      as at December 31, 2001 and 2000                                        3

   CONSOLIDATED STATEMENTS OF OPERATIONS
      for the years ended December 31, 2001, 2000 and 1999 and
      for the cumulative period from June 1, 1998 to December 31, 2001        4

   STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
      for the years ended December 31, 2001, 2000 and 1999                    5


   CONSOLIDATED STATEMENTS OF CASH FLOWS
      for the years ended December 31, 2001, 2000 and 1999 and
      for the cumulative period from June 1, 1998 to December 31, 2001        6

   NOTES TO THE FINANCIAL STATEMENTS                                          9


<PAGE>

                    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, 2001 and 2000, and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for the years ended
December 31, 2001, 2000 and 1999 and the cumulative period from June 1, 1998
(date of commencement of operations) to December 31, 2001. 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, 2001 and 2000, and its
consolidated results of operations, changes in shareholders' equity and cash
flows for the years ended December 31, 2001, 2000 and 1999 and the cumulative
period from June 1, 1998 (date of commencement of operations) to December 31,
2001, 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 30, 2002


                                      -2-

<PAGE>

                      MARNETICS BROADBAND TECHNOLOGIES LTD.
                          (A DEVELOPMENT STAGE COMPANY)
                              (U.S.$ IN THOUSANDS)

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                               DECEMBER 31,
                                                           --------------------
                                                             2001        2000
                                                           --------    --------
<S>                                                        <C>         <C>
CURRENT ASSETS:
Cash and cash equivalents                                  $  2,418    $  6,546
Receivables:
   Trade                                                         --         723
   Related parties (Note 3)                                      --         690
   Other  (Note 6a)                                             248         123
Inventories                                                      --         224
Recoverable costs and estimated earnings- not yet billed         --       3,255
                                                           --------    --------
      TOTAL CURRENT ASSETS                                    2,666      11,561
                                                           --------    --------

LONG-TERM LOAN TO RELATED PARTIES (Note 3)                       --       1,272
                                                           --------    --------
INVESTMENT IN AFFILIATE (NOTE 4 & 13)                           582         582
                                                           --------    --------
FIXED ASSETS (Notes 2e & 5)
Cost                                                            267       1,065
Less - accumulated depreciation                                   8         413
                                                           --------    --------
                                                                259         652
                                                           --------    --------
OTHER ASSETS (NOTE 1&12)                                         --      11,309
                                                           --------    --------
                                                           $  3,507    $ 25,376
                                                           ========    ========
CURRENT LIABILITIES:
Short-term bank credit (Note 6b)                           $     50    $  3,337
Payables:
   Trade                                                        135       1,553
   Other (Note 6c)                                              885       1,746
                                                           --------    --------
      TOTAL CURRENT LIABILITIES                               1,070       6,636
                                                           --------    --------
LONG-TERM LIABILITIES (Note 7)                                   --          65
                                                           --------    --------
ACCRUED SEVERANCE PAY                                            --         148
                                                           --------    --------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 8)
SHAREHOLDERS' EQUITY (Note 9)
Share capital:
Ordinary shares of NIS 0.08 par value
   (Authorized, 25,000,000 shares, issued and
   outstanding at December 31, 2000 and
   2001 6,407,333 and 7,362,390 respectively)                   130         130
Additional paid-in capital                                   25,203      25,143
Deferred stock based compensation                            (1,584)     (2,329)
Accumulated deficit                                         (21,312)     (4,417)
                                                           --------    --------
                                                              2,437      18,527
                                                           --------    --------
                                                           $  3,507    $ 25,376
                                                           ========    ========
</TABLE>

    THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS


                                      -3-

<PAGE>

                      MARNETICS BROADBAND TECHNOLOGIES LTD.
                          (A DEVELOPMENT STAGE COMPANY)
              (U.S.$ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                             CUMULATIVE FROM
                                                                                              JUNE 1, 1998
                                                                                                (DATE OF
                                                                                               COMMENCEMENT
                                                           YEAR ENDED DECEMBER 31,           OF OPERATIONS)
                                                   --------------------------------------    TO DECEMBER 31,
                                                      2001          2000          1999             2001
                                                   ----------    ----------    ----------    ---------------
<S>                                                <C>           <C>           <C>           <C>
Research and development costs (excluding
   $745 and $883 of non-cash compensation
   for the year ended December 31, 2001 and
   cumulative from June 1, 1998 to
   December 31, 2001, respectively) (Note 11a)     $      812    $      252    $       33    $    1,228
Sales and marketing expenses, net (Note 11b)              310           142            --           452
General and administrative expenses
   (excluding $60 and $2,330 of non-cash
   compensation for the year ended December 31,
   2001 and cumulative from June 1, 1998 to
   December 31, 2001, respectively) (Note 11c)          1,128           722            44         2,075
Provision for legal claim (Note 8d)                       750            --            --           750
Impairment of goodwill (Note 12)                        9,309            --            --         9,309
Loss allowance on loan to related party (Note 3)        1,228            --            --         1,228
Non-cash compensation expenses                            805         2,408            --         3,213
                                                   ----------    ----------    ----------    ----------
OPERATING LOSS                                        (14,342)       (3,524)          (77)      (18,255)

Financial income, net                                     175           167             9           359

Loss on sale of property and equipment                     --            --           (28)          (28)

Share in losses of affiliate                               --          (639)          (21)         (660)
                                                   ----------    ----------    ----------    ----------
LOSS FROM CONTINUING OPERATIONS                       (14,167)       (3,996)         (117)      (18,584)

DISCONTINUED OPERATIONS:
Loss from operations of electrical division              (450)           --            --          (450)
Loss on sale of electrical division                    (2,278)           --            --        (2,278)
                                                   ----------    ----------    ----------    ----------
LOSS FOR THE PERIOD                                $  (16,895)   $   (3,996)   $     (117)   $  (21,312)
                                                   ==========    ==========    ==========    ==========
PER SHARE DATA (NOTE 2G)
Basic and diluted:
LOSS PER SHARE FROM CONTINUING OPERATIONS          $    (2.11)   $    (4.15)   $    (0.20)
                                                   ==========    ==========    ==========
LOSS FROM DISCONTINUED OPERATIONS                  $    (0.40)   $       --    $       --
                                                   ==========    ==========    ==========
NET LOSS                                           $    (2.51)   $    (4.15)   $    (0.20)
                                                   ==========    ==========    ==========
SHARES USED IN COMPUTING
  LOSS PER ORDINARY SHARE
Basic and diluted                                   6,725,685       962,553       575,234
                                                   ==========    ==========    ==========
</TABLE>

    THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS


                                      -4-

<PAGE>

                      MARNETICS BROADBAND TECHNOLOGIES LTD.
                          (A DEVELOPMENT STAGE COMPANY)
                               (U.S.$ IN THOUSANDS)
                       STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                                          DEFICIT
                                                                                                        ACCUMULATED
                                                                             ADDITIONAL                 DURING THE
                                                  NUMBER OF      SHARE        PAID-IN      DEFERRED     DEVELOPMENT
                                                    SHARES      CAPITAL       CAPITAL    COMPENSATION      STAGE        TOTAL
                                                  ---------    ----------    ----------  ------------   -----------   ----------
<S>                                               <C>          <C>           <C>          <C>           <C>           <C>
BALANCE AT JANUARY 1, 1999                          266,000    $        1    $      682   $       --    $     (304)   $      379
Issuance of shares for no consideration                 559
Adjustment due to issuance of shares of a
   development - stage affiliate to a third
   party                                                                            146                                      146
Loss for the year                                                                                             (117)         (117)
                                                  ---------    ----------    ----------   ----------    ----------    ----------
BALANCE AT DECEMBER 31, 1999                        266,559             1           828           --          (421)          408
                                                  ---------    ----------    ----------   ----------    ----------    ----------
Issuance of share capital                           388,237             1         7,297                                    7,298
Adjustments due to issuance of shares of a
   development - stage affiliate to a third
   party                                                                          1,095                                    1,095
Issuance of options to a related party                                              270                                      270
Deferred compensation related to employee
   stock option grants                                                              631         (631)                         --
Adjustments due to reverse merger - additional
   compensation due to a new measurement date                                     1,836       (1,836)                         --
Amortization of deferred compensation                                                            138                         138
Adjustments due to reverse merger                   759,489            30                                                     30
Issuance of shares in a reverse merger            4,993,048            98        11,186                                   11,284
Compensation relating to options granted to
   former CEO and chairman of the board                                           2,000                                    2,000
Loss for the period                                                                                         (3,996)       (3,996)
                                                  ---------    ----------    ----------   ----------    ----------    ----------
BALANCE AT DECEMBER 31, 2000                      6,407,333           130        25,143       (2,329)       (4,417)       18,527
                                                  ---------    ----------    ----------   ----------    ----------    ----------
Amortization of deferred compensation                                                            745                         745
Compensation related to options granted to
   service providers                                                                 60                                       60
Issuance of shares for no consideration             955,057
Loss for the year                                                                                          (16,895)      (16,895)
                                                  ---------    ----------    ----------   ----------    ----------    ----------
BALANCE AT DECEMBER 31, 2001                      7,362,390    $      130    $   25,203   $   (1,584)   $  (21,312)   $    2,437
                                                  =========    ==========    ==========   ==========    ==========    ==========
</TABLE>

    THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS


                                      -5-

<PAGE>

                      MARNETICS BROADBAND TECHNOLOGIES LTD.
                          (A DEVELOPMENT STAGE COMPANY)
                               (U.S.$ IN THOUSANDS)
                      STATEMENTS OF CONSOLIDATED CASH FLOWS

<TABLE>
<CAPTION>
                                                                                   CUMULATIVE FROM
                                                                                     JUNE 1, 1998
                                                                                      (DATE OF
                                                                                   COMMENCEMENT OF
                                                  YEAR ENDED DECEMBER 31,          OPERATIONS) TO
                                              --------------------------------       DECEMBER 31,
                                                2001        2000        1999            2001
                                              --------    --------    --------     ---------------
<S>                                           <C>         <C>         <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss for the period                           $(16,895)   $ (3,996)   $   (117)       $(21,312)
Adjustments to reconcile loss
   for the period to cash used
   in operating activities (Appendix A):        12,775       3,124          (7)         15,959
                                              --------    --------    --------        --------
   Net cash used in operating
      activities                                (4,120)       (872)       (124)         (5,353)
                                              --------    --------    --------        --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired in a non-cash reverse
   merger (Appendix B)                              --          22          --              22
Purchase of fixed assets                           (85)       (186)         --            (318)
Proceeds from sale of fixed assets                  --          --          10              10
                                              --------    --------    --------        --------
   Net cash provided by (used in)
      investing activities                         (85)       (164)         10            (286)
                                              --------    --------    --------        --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term debt, net                              (751)         --          --            (751)
Repayment of long-term loan                        828          --          --             828
Issuance of share capital                           --       7,298          --           7,981
Investment in affiliate                             --          --          (1)             (1)
                                              --------    --------    --------        --------
   Net cash provided by (used in)
      financing activities                          77       7,298          (1)          8,057
                                              --------    --------    --------        --------
Increase (decrease) in cash
   and cash equivalents                         (4,128)      6,262        (115)          2,418

Cash and cash equivalents
   at the beginning of the period                6,546         284         399              --
                                              --------    --------    --------        --------
Cash and cash equivalents
   at the end of the period                   $  2,418    $  6,546    $    284        $  2,418
                                              ========    ========    ========        ========
</TABLE>

    THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS


                                      -6-

<PAGE>

                      MARNETICS BROADBAND TECHNOLOGIES LTD.
                          (A DEVELOPMENT STAGE COMPANY)
                               (U.S.$ IN THOUSANDS)

               APPENDICES TO CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                 CUMULATIVE FROM
                                                                                   JUNE 1, 1998
                                                                                     (DATE OF
                                                                                 COMMENCEMENT OF
                                                  YEAR ENDED DECEMBER 31,         OPERATIONS) TO
                                             --------------------------------      DECEMBER 31,
                                               2001        2000        1999           2001
                                             --------    --------    --------    ---------------
<S>                                          <C>         <C>         <C>         <C>
APPENDIX A
ADJUSTMENTS TO RECONCILE LOSS FOR THE
   PERIOD TO NET CASH USED IN
    OPERATING ACTIVITIES:

Depreciation                                 $     53    $      8    $      2    $     70
Loss on sale of fixed assets                       --          --          28          28
Share in losses of affiliate                       --         639          21         660
Loss on sale of discontinued operations
   (Appendix C)                                 2,278          --          --       2,278
Impairment of goodwill                          9,309          --          --       9,309
Loss allowance on loan to related party         1,228          --          --       1,228
Non cash compensation expenses                    805       2,408          --       3,213


Changes in assets and liabilities:
Decrease (increase) in accounts receivable        303         (61)         (1)        235
Increase in other receivables                    (235)         --          --        (235)
Decrease in inventories                           684          --          --         684
(Decrease) increase in trade payables          (1,342)         34         (20)     (1,307)
(Decrease) Increase in other payables
   and accrued expenses                          (308)         96         (37)       (204)
                                             --------    --------    --------    --------
                                             $ 12,775    $  3,124    $     (7)   $ 15,959
                                             ========    ========    ========    ========
SUPPLEMENTAL CASH FLOW DATA
APPENDIX B:
PURCHASE OF A SUBSIDIARY IN A REVERSE
   MERGER:
Current assets                                           $  4,947                $  4,947
Non-current assets                                          1,272                   1,272
Fixed assets                                                  474                     474
Goodwill                                                   11,309                  11,309
Current liabilities                                        (6,497)                 (6,497)
Long-term liabilities                                        (213)                   (213)
Cash acquired                                                  22                      22
                                                         --------                --------
Total non-cash consideration                             $ 11,314                $ 11,314
                                                         ========                ========
</TABLE>

    THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS


                                      -7-

<PAGE>


                      MARNETICS BROADBAND TECHNOLOGIES LTD.
                          (A DEVELOPMENT STAGE COMPANY)
                               (U.S.$ IN THOUSANDS)

               APPENDICES TO CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                 CUMULATIVE FROM
                                                                                   JUNE 1, 1998
                                                                                     (DATE OF
                                                                                 COMMENCEMENT OF
                                             YEAR ENDED DECEMBER 31,              OPERATIONS) TO
                                             --------------------------------      DECEMBER 31,
                                               2001        2000        1999           2001
                                             --------    --------    --------    ---------------
<S>                                          <C>         <C>         <C>         <C>
APPENDIX C:
SALE OF ELECTRICAL DIVISION:
Current assets                               $  1,076                            $  1,076
Fixed assets                                      425                                 425
Goodwill                                        2,000                               2,000
Current liabilities                              (867)                               (867)
Long-term liabilities                            (356)                               (356)
                                             --------                            --------
Loss on sale of electrical division
   (see Note 3b)                             $  2,278                            $  2,278
                                             ========                            ========

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                              $  2,173                            $  2,173
Assignment of a receivable                     (2,173)                             (2,173)
                                             --------                            --------
                                             $     --                            $     --
                                             ========                            ========
</TABLE>

     THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS


                                      -8-

<PAGE>

                      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 fortification 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 presents information as if the
     acquisition of Stav occurred at the beginning of the periods presented. 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.

<TABLE>
<CAPTION>
                                                             (UNAUDITED)
                                                     --------------------------
                                                       YEAR ENDED DECEMBER 31,
                                                     --------------------------
                                                       2000              1999
                                                     --------          --------
     <S>                                             <C>               <C>
     Revenues                                        $  4,498          $  5,152
     Net income                                       (10,751)           (1,227)
     Earnings per share:
     Basic                                              (1.68)            (0.19)
     Diluted                                         $  (1.68)         $  (0.19)
</TABLE>

     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 is in doubt (See also Note
     3).

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 $16,895,000 for the year ended December 31,
     2001 and as of that date has accumulated loss of $ 21,312,000. The future
     of the Company is dependent upon future profitable operations from the
     commercial success of its operations. Management is actively seeking
     additional capital that will provide funds needed to fund its operations in
     order to fully implement its business plans.

     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.


                                      -9-

<PAGE>

                      MARNETICS BROADBAND TECHNOLOGIES LTD.
                          (A DEVELOPMENT STAGE COMPANY)
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


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.

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                                         3 years
     Furniture and fixtures                                     10-15 years

     In accordance with SFAS No. 121, "Accounting for the Impairment of
     Long-Lived Assets and for Long-Lived Assets to be Disposed Of," management
     reviews long-lived assets and certain identifiable intangibles for
     impairment whenever events or changes in circumstances indicate that the
     carrying amount of an asset may not be recoverable based on estimated
     future cash flows. An impairment loss is recognized when the undiscounted
     future cash flows are less than the carrying value of the assets. The loss
     recognized would be equal to the difference between the carrying value and
     the fair value of the asset.


                                      -10-

<PAGE>

                      MARNETICS BROADBAND TECHNOLOGIES LTD.
                          (A DEVELOPMENT STAGE COMPANY)
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (cont.)

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.   RECENT ACCOUNTING PRONOUNCEMENTS

     In July 2001, the Financial Accounting Standards Board ("FASB") issued
     statement of Financial Accounting Standards No. 141 ("SFAS 141"), Business
     Combinations." SFAS 141 requires the purchase method of accounting for
     business combinations initiated after June 30, 2001 and eliminates the
     pooling-of-interests method. The Company does not believe that the adoption
     of SFAS 141 will have a significant impact on its financial statements.

     In July 2001, the FASB issued Statement of Financial Accounting Standards
     No. 142 ("SFAS 142"), Goodwill and Other Intangible Assets", which is
     effective January 1, 2002. SFAS 142 requires, among other things, the
     discontinuance of goodwill amortization. In addition, the standard includes
     provisions for the reclassification of certain existing recognized
     intangibles as goodwill, reassessment of the useful lives of existing
     recognized intangibles, reclassification of certain intangibles out of
     previously reported goodwill and the identification of reporting units for
     transitional goodwill impairment test six months from the date of adoption.
     The Company does not believe that the adoption of SFAS 142 will have a
     significant impact on its financial statements.

     In June 2001, the FASB issued Statement of Financial Accounting Standards
     No. 143, "Accounting for Asset Retirement Obligations" ("FAS 143"), which
     is effective for years beginning after June 15, 2002, which will be the
     Company's fiscal year 2003. FAS 143 addresses legal obligations associated
     with the retirement of tangible long-lived assets that result from the
     acquisition, construction, development or normal operation of a long-lived
     asset. The standard requires that the fair value of a liability for an
     asset retirement obligation be recognized in the period in which it is
     incurred if a reasonable estimate of fair value can be made. Any associated
     asset retirement costs are to be capitalized as part of the carrying amount
     of the long-lived asset and expensed over the life of the asset. The
     Company does not believe that the adoption of SFAS 143 will have a
     significant impact on its financial statements.

     In August 2001, the FASB issued Statement of Financial Accounting Standards
     No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets
     (FAS 144), which addresses financial accounting and reporting for the
     impairment or disposal of long-lived assets and supersedes SFAS No. 121,
     Accounting for the Impairment of Long-Lived Assets and for Long-Lived
     Assets to be Disposed Of, and the accounting and reporting provisions of
     APB Opinion No. 30, Reporting the Results of Operations, for a disposal of
     a segment of a business. FAS 144 is effective for fiscal years beginning
     after December 15, 2001, with earlier application encouraged. The Company
     has not yet determined what the effect of FAS 144 will be on the earnings
     and financial position of the Company.


                                      -11-

<PAGE>

                      MARNETICS BROADBAND TECHNOLOGIES LTD.
                          (A DEVELOPMENT STAGE COMPANY)
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


NOTE 3 - RELATED PARTIES

<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                     ---------------------------
                                                       2001                2000
                                                     -------             -------
     <S>                                             <C>                 <C>
     MR. DOV STRIKOVSKI (FORMER CEO AND FORMER
        CHAIRMAN OF THE BOARD):
     Loan a.(1)                                      $    --             $ 1,484
                                                     -------             -------
     Current account a.(2)                           $    --             $   478
                                                     =======             =======
</TABLE>

a.(1) 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 January 2001.
      At December 31, 2001 the Company reassessed the collectibility of the
      loan, 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.

  (2) 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.

  (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 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.

  (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 collectibility probability, decided
      to establish an allowance on the amount not yet collected.

  (4) To secure his obligations under the various agreements Mr. Strikovsky has
      collateralized 300,000 shares that he owns of the Company.


                                      -12-

<PAGE>

                      MARNETICS BROADBAND TECHNOLOGIES LTD.
                          (A DEVELOPMENT STAGE COMPANY)
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


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 15%. Effective January 1, 2001
the investment is carried at cost (see also Note 13).

NOTE 5 - FIXED ASSETS

<TABLE>
<CAPTION>
                                                             DECEMBER 31,
                                                      -------------------------
                                                        2001              2000
                                                      -------           -------
<S>                                                   <C>               <C>
Cost:
   Computers and software                             $   178           $   304
   Leasehold improvements                                  50               116
   Motor vehicles                                          --               610
   Furniture and fixtures                                  39                35
                                                      -------           -------
                                                      $   267           $ 1,065
                                                      =======           =======
Accumulated depreciation:
   Computers and software                             $    (6)          $  (100)
   Leasehold improvements                                  (1)              (55)
   Motor vehicles                                          --              (257)
   Furniture and fixtures                                  (1)               (1)
                                                      -------           -------
                                                      $    (8)          $  (413)
                                                      =======           =======
</TABLE>

NOTE 6 - SUPPLEMENTARY BALANCE SHEET INFORMATION

A.   OTHER RECEIVABLES

<TABLE>
<CAPTION>
                                                             DECEMBER 31,
                                                      --------------------------
                                                        2001              2000
                                                      -------           --------
     <S>                                              <C>               <C>
     Prepaid expenses                                 $    13           $     77
     Restricted cash                                       30                 24
     Advances to suppliers                                 --                 14
     Government authorities                               102                 --
     Others                                               103                  8
                                                      -------           -------
                                                      $   248           $    123
                                                      =======           ========
</TABLE>

B.   SHORT-TERM BANK CREDIT

<TABLE>
<CAPTION>
                                                             DECEMBER 31,
                                     INTEREST RATES    -------------------------
                                          %             2001            2000
                                    --------------     ------       ------------
     <S>                              <C>              <C>             <C>
     UNLINKED SHEKEL CREDIT
     Overdraft                        13.7-10.2        $   50          $2,609
     Short-term loans                  6.2-10.2            --             680
                                                       ------          ------
                                                           50           3,289
     Current maturities of
        long-term loans                                    --              48
                                                       ------          ------
                                                       $   50          $3,337
                                                       ======          ======
</TABLE>

Liens - see Note 8c

                                      -13-

<PAGE>

                      MARNETICS BROADBAND TECHNOLOGIES LTD.
                          (A DEVELOPMENT STAGE COMPANY)
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


NOTE 6 - SUPPLEMENTARY BALANCE SHEET INFORMATION (cont.)

C.   OTHER PAYABLES:

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                           ---------------------
                                                            2001           2000
                                                           ------         ------
     <S>                                                   <C>            <C>
     Wages and related accruals                            $   52         $  508
     Government authorities                                    27            834
     Accrued expenses (see also Note 8d)                      806            284
     Other                                                     --            120
                                                           ------         ------
                                                           $  885         $1,746
                                                           ======         ======
</TABLE>

NOTE 7 - LONG-TERM LIABILITIES

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                           ---------------------
                                                            2001           2000
                                                           ------         ------
     <S>                                                   <C>            <C>
     Long-term loan                                        $   --         $   44
     Finance leases                                            --             85
     Less - current maturities                                 --             48
                                                           ------         ------
                                                               --             81
     Less - deposit                                            --             16
                                                           ------         ------
                                                           $   --         $   65
                                                           ======         ======
</TABLE>




                                      -14-

<PAGE>

                      MARNETICS BROADBAND TECHNOLOGIES LTD.
                          (A DEVELOPMENT STAGE COMPANY)
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


NOTE 8 - COMMITMENTS AND CONTINGENT LIABILITIES

A.   LEASE AGREEMENT

     The facilities of the subsidiary are rented under an operating lease for a
     period of one year commencing May 14, 2000 and include a two-year lease
     extension option to extend the lease for one year periods upon prior
     written notice. The Company exercised the option and extended the lease
     term for additional year. The rent expenses under the operating lease for
     the year ended December 31, 2001 totaled $ 35,000.

B.   EMPLOYMENT AGREEMENT

     In June 1999, the Company entered into an employment agreement with Mr.
     Strikovsky providing that, through December 31, 2002, Mr. Strikovsky will
     serve as President and Chief Executive Officer of the Company at a base
     salary of $15,000 per month payable in New Israeli Shekels. The contract
     was terminated effective March 31, 2001, the date on which Mr. Strikovsky
     resigned from his duties.

C.   LIENS, SECURITY AND GUARANTEES

     1.   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 also Note 3b). The Company was
          informed that Hod-Hashron is delaying its payments due to the Bank.
          According to the Bank Agreement the Bank was entitled to exercise the
          guarantee no earlier than May 31, 2002, or if legal procedures are
          carried out against Hod-hasharon no earlier than November 30, 2002.
          The legal advisors of the Company are of the opinion that legal
          procedures have been commenced against Hod-Hasharon and the Bank can
          exercise the guarantee no earlier than November 30, 2002.

     2.   As of December 31, 2001, the Company was contingently liable for bank
          guarantees under performance obligations to customers totaling US$
          184,000.

D.   LEGAL CLAIM

     The Company 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 is in the process of filing an appeal on the court
     decision. The Company has established an allowance in the amount of
     $750,000 to provide for its possible exposure.


                                      -15-

<PAGE>

                      MARNETICS BROADBAND TECHNOLOGIES LTD.
                          (A DEVELOPMENT STAGE COMPANY)
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


NOTE 9 - SHARE CAPITAL

a.   In December 1998 the Company consummated an Initial Public Offering (IPO).

     Subsequent to the IPO, the Company's ordinary shares are quoted and listed
     on the American Stock Exchange (AMEX).

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 Communications Ltd. for $2,000 thousand.

d.   Through September 30, 2000, Marnetics has agreed to grant to specific
     employees options to purchase 40,437 ordinary shares of the Company
     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 such options were replaced with 308,300 options to
     purchase ordinary shares of the Company (see also Note 9(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 9(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 is 1,978,101 of which 390,351 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 have to be divided pro-ratably between the formers
     shareholder of Marnetics. The Company issued 955,057 shares which were
     divided pro-ratably according to the agreement.


                                      -16-

<PAGE>

                      MARNETICS BROADBAND TECHNOLOGIES LTD.
                          (A DEVELOPMENT STAGE COMPANY)
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


NOTE 10 - 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:

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                           --------------------
                                                             2001         2000
                                                           -------      -------
<S>                                                        <C>          <C>
Deferred tax assets:
Net operating loss carryforwards in Israel                 $(3,507)     $(1,786)
Accrued severance pay, inventory adjustments,
   accrued vacation pay and allowances for
   doubtful debts                                               --          (96)

Less - Valuation allowance                                   3,507        1,882
                                                           -------      -------
   Balance                                                 $    --      $    --
                                                           =======      =======
</TABLE>


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 carryforwards is less likely
than not, a valuation allowance has been established for the amounts of the
related tax benefits.

Tax loss carryforwards of the Company and its subsidiary company totalling US$
9,700 thousand are unlimited in duration, denominated in NIS and linked to the
Israeli consumer price index.

TAX ASSESSMENTS

The Company has not been assessed for income tax purposes since incorporation.

NOTE 11 - SUPPLEMENTARY STATEMENT OF OPERATIONS INFORMATION

A.   RESEARCH AND DEVELOPMENT COSTS

<TABLE>
<CAPTION>
                                                                CUMULATIVE FROM
                                                                  JUNE 1, 1998
                                                                   (DATE OF
                                                                 COMMENCEMENT
                                YEAR ENDED DECEMBER 31,        OF OPERATIONS) TO
                            ------------------------------        DECEMBER 31,
                             2001        2000        1999             2001
                            ------      ------      ------     -----------------
<S>                         <C>         <C>         <C>              <C>
Salaries and related
   expenses                 $  670      $  217      $   11           $  998
Sub-contractors                 --          17          20               60
Depreciation                    --           6           2               16
Other                          142          12          --              154
                            ------      ------      ------           ------
                            $  812      $  252      $   33           $1,228
                            ======      ======      ======           ======
</TABLE>


                                      -17-

<PAGE>

                      MARNETICS BROADBAND TECHNOLOGIES LTD.
                          (A DEVELOPMENT STAGE COMPANY)
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


NOTE 11 - SUPPLEMENTARY STATEMENT OF OPERATIONS INFORMATION (cont.)

B.     SALES AND MARKETING EXPENSES, NET

<TABLE>
<CAPTION>
                                                                CUMULATIVE FROM
                                                                  JUNE 1, 1998
                                                                   (DATE OF
                                                                 COMMENCEMENT
                                  YEAR ENDED DECEMBER 31,      OF OPERATIONS) TO
                               ----------------------------       DECEMBER 31,
                                2001       2000       1999          2001
                               ------     ------     ------    -----------------
<S>                            <C>        <C>        <C>             <C>
Salaries and related
   expenses                    $  251     $   95     $   --          $  346
Advertising and marketing
   Costs                           75         61         --             136
                               ------     ------     ------          ------
Gross sales and marketing
   Costs                          326        156         --             482

Less-participation from
   the Government of Israel       (16)       (14)        --             (30)
                               ------     ------     ------          ------
                               $  310     $  142     $   --          $  452
                               ======     ======     ======          ======
</TABLE>

C.   GENERAL AND ADMINISTRATIVE EXPENSES

<TABLE>
<CAPTION>
                                                                CUMULATIVE FROM
                                                                  JUNE 1, 1998
                                                                   (DATE OF
                                                                 COMMENCEMENT
                                  YEAR ENDED DECEMBER 31,      OF OPERATIONS) TO
                               ----------------------------       DECEMBER 31,
                                2001       2000       1999          2001
                               ------     ------     ------    -----------------
<S>                            <C>        <C>        <C>             <C>
Salaries and related expenses  $  472     $  242     $   11          $  826
Professional services             321        305          8             660
Management fee                     --         43         --              43
Others                            335        132         25             546
                               ------     ------     ------          ------
                               $1,128     $  722     $   44          $2,075
                               ======     ======     ======          ======
</TABLE>


NOTE 12 - IMPAIRMENT OF GOODWILL

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 Note 1 &
3b). The result of the assessment was a full write-off of the goodwill in the
amount of $9,309,000.

NOTE 13 - SUBSEQUENT EVENTS - UNAUDITED

Speedwise is actively seeking additional funds to enable it to continue its
operations through the end of the year. If such additional funds will not be
available for Speedwise or if a business combination is effected with Speedwise
reflecting a lower value for Speedwise than the carrying amount, some or all of
the Company's investment may not be recoverable. (see Note 4)


                                      -18-