---

---

As filed with the Securities and Exchange Commission on June 30, 2003

UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 20-F

(Mark One)

|                                 | oRegistration statement
  pursuant to section 12(b) or 12(g) of the Securities Exchange Act of 1934                                                    
|-------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------
|                                 |                                                                                                                                                        
|                                 | xAnnual Report pursuant to
  Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal
  year ended December 31, 2002                  
|                                 |                                                                                                                                                        
|                                 | oTransition Report pursuant
  to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the
  Transition period from ___________ to ___________
|                                
|Commission File Number 333-11396

OPTIBASE 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)

2 Gav Yam
Center
7 Shenkar Street
Herzliya 46120, Israel
+972-9-970-9288(Address of principal executive offices)

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

|Title of Each Class |  | Name of Each Exchange on Which Registered
|------------------- |  | -----------------------------------------
|None                |  | Not Applicable                           

Securities registered pursuant to Section
12(g) of the Act:

Ordinary
Shares,
Nominal value NIS 0.13 per share(Title of class)

Securities for which there is a reporting obligation
pursuant to Section 15(d) of the Act:
Not Applicable(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 December 31, 2002, the
period covered by the annual report: 12,341,388Ordinary Shares.

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 o

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

Item
17o Item 18 x

---

---

TABLE
OF CONTENTS

|         |                                                                       |                                                         | PAGE
|-------- | --------------------------------------------------------------------- | ------------------------------------------------------- | ----
|         |                                                                      
|PART
  I | 5                                                                    
|         |                                                                       |                                                        
|         | ITEM 1.  IDENTITY OF DIRECTORS, SENIOR MANAGEMENT ANDADVISERS         | 5                                                      
|         | ITEM 2.  OFFER STATISTICS AND EXPECTED TIMETABLE                      | 5                                                      
|         | ITEM 3.  KEY INFORMATION                                              | 5                                                      
|         |                                                                       | Selected Financial Data                                 | 5   
|         |                                                                       | Capitalization and indebtedness                         | 6   
|         |                                                                       | Reasons for the offer and use of proceeds               | 6   
|         |                                                                       | Risk Factors                                            | 6   
|         | ITEM 4.  INFORMATION ON THE COMPANY                                   | 16                                                     
|         |                                                                       | History and development of the company                  | 16  
|         |                                                                       | Business overview                                       | 19  
|         |                                                                       | Organizational Structure                                | 33  
|         |                                                                       | Property, plants and equipment                          | 33  
|         | ITEM 5.  OPERATING AND FINANCIAL REVIEW AND
  PROSPECTS               | 34                                                     
|         |                                                                       | Overview                                                | 34  
|         |                                                                       | Operating results                                       | 37  
|         |                                                                       | Liquidity and capital resources                         | 47  
|         |                                                                       | Research and development, patents and licenses, etc.    | 48  
|         |                                                                       | Trend information                                       | 48  
|         | ITEM 6.  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                   | 49                                                     
|         |                                                                       | Directors, senior management                            | 49  
|         |                                                                       | Compensation                                            | 51  
|         |                                                                       | Board of Directors and Committees                       | 52  
|         |                                                                       | Employees                                               | 54  
|         |                                                                       | Share ownership                                         | 55  
|         | ITEM 7.  MAJOR SHAREHOLDERS AND RELATED PARTY
  TRANSACTIONS          | 56                                                     
|         |                                                                       | Major Shareholders                                      | 56  
|         |                                                                       | Related Party Transactions                              | 58  
|         |                                                                       | Interests of experts and counsel                        | 58  
|         | ITEM 8.  FINANCIAL INFORMATION                                        | 58                                                     
|         |                                                                       | Consolidated Statements and Other Financial Information | 58  
|         |                                                                       | Significant Changes                                     | 59  
|         | ITEM 9.  THE OFFER AND LISTING                                        | 59                                                     
|         | ITEM 10.  ADDITIONAL INFORMATION                                      | 60                                                     
|         |                                                                       | Share capital                                           | 60  
|         |                                                                       | Articles of Incorporation                               | 60  
|         |                                                                       | Material contracts                                      | 62  
|         |                                                                       | Exchange controls                                       | 63  
|         |                                                                       | Taxation                                                | 63  
|         |                                                                       | Dividend and paying agents                              | 69  
|         |                                                                       | Statement by experts                                    | 69  
|         |                                                                       | Documents on display                                    | 69  
|         |                                                                       | Subsidiary information                                  | 69  
|         | ITEM 11.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
  MARKET RISK | 69                                                     
|         | ITEM 12.  DESCRIPTION OF SECURITIES OTHER THAN
  EQUITY SECURITIES    | 70                                                     
|         |                                                                      

2

---

---

|PART
  II              | 70                                                                                      
|---------------------- | ----------------------------------------------------------------------------------------
|                       |                                                                                         
|                       | ITEM 13.  DEFAULTS, DIVIDEND ARREARAGES AND
  DELINQUENCIES                             
|                       | ITEM 14.  MATERIAL MODIFICATIONS TO THE RIGHTS OF
  SECURITY HOLDERS AND USE OF PROCEEDS
|                       | ITEM 15. CONTROLS AND
  PROCEDURES                                                      
|                       | ITEM 16.                                                                                
|                       | ITEM 17.                                                                                
|                       |                                                                                         
|PART
  III             | 70                                                                                      
|                       |                                                                                         
|                       | ITEM 18.  FINANCIAL STATEMENTS                                                          
|                       | ITEM 19.  EXHIBITS AND FINANCIAL SCHEDULES                                              
|                       |                                                                                         
|FINANCIAL
  STATEMENTS | F1-F40                                                                                  
|                       |                                                                                         
|                       |                                                                                         
|                       |                                                                                         
|                       |                                                                                         
|                       |                                                                                         
|                       |                                                                                         
|                       |                                                                                         
|                       |                                                                                         
|                       |                                                                                         
|SIGNATURES             | 73                                                                                      
|                       |                                                                                         
|CERTIFICATIONS         | 74                                                                                      
|                       |                                                                                         

3

---

---

Currency of Presentation and Certain Defined Terms

Unless
the context otherwise requires, references herein to the Company, Optibase,
we, us or our are to Optibase Ltd., a company organized under the laws of
Israel, and its wholly-owned subsidiaries, Optibase, Inc., a Californian
corporation and Optibase B.V. a company organized under the laws of
Netherlands. In addition, reference to our financial statements are to our
consolidated financial statements, except as the context otherwise requires.  References to U.S. or United States are
to the United States of America, its territories and its possessions.

We have
registered Optibase and the accompanying design, MPEG Organizer,
Progression, VideoPlex and DVDFab! as registered trademarks.  In addition, the names MPEG MovieMaker
200, VideoPlex Xpress, VideoPlex Pro, MPEG MovieMaker, Videoplex,
MPEG ComMotion, MPEG Composer, MPEGLAB VideoPump, MediaPump,
Viewstore, Viewgraphics, DTV:Net and DTV:Com are our trademarks.  This Annual Report also contains trademarks
and trade names of other companies.

In this Annual
Report, references to $ or Dollars or U.S. Dollars are to the legal
currency of the United States and references to NIS are to New Israeli
Shekels, the legal currency of Israel. 
The Companys financial statements are presented in accordance with
United States generally accepted accounting principles, or U.S. GAAP.  Except as otherwise specified, financial
information is presented in U.S. Dollars. 
References to a particular fiscal year are to the Companys fiscal
year ended December 31 of such year.

Forward-Looking Statements May Prove
Inaccurate

IN
ADDITION TO HISTORICAL INFORMATION, THIS ANNUAL REPORT CONTAINS CERTAIN
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED.  THE FORWARD-LOOKING
STATEMENTS CONTAINED HEREIN ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE REFLECTED IN THE
FORWARD-LOOKING STATEMENTS.  FACTORS
THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED IN THE SECTIONS ENTITLED RISK FACTORS AND OPERATING AND FINANCIAL
REVIEW AND PROSPECTS AND ELSEWHERE IN THIS REPORT.  READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE
FORWARD-LOOKING STATEMENTS, WHICH REFLECT MANAGEMENTS ANALYSIS ONLY AS OF THE
DATE HEREOF.  IN ADDITION, READERS
SHOULD CAREFULLY REVIEW THE OTHER INFORMATION IN THIS ANNUAL REPORT AND IN THE
COMPANYS PERIODIC REPORTS AND OTHER DOCUMENTS FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION FROM TIME TO TIME. WE DO NOT UNDERTAKE ANY OBLIGATION TO
UPDATE ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION,
FUTURE EVENTS OR OTHERWISE.

4

---

---

Part I

Item 1. Identity of Directors,
Senior Management and Advisers

Not
required.

Item 2. Offer Statistics and
Expected Timetable

Not
required.

Item 3. Key Information

3.A.
Selected Financial Data.

We derived
the consolidated statement of operations data for the years ended
December 31, 2000, 2001 and 2002, and consolidated balance sheet data as
of December 31, 2001 and 2002 from the audited consolidated financial
statements appearing elsewhere in this Annual Report.  These financial statements have been prepared in accordance with
U.S. GAAP.  We derived the consolidated
statement of operations data for the years ended December 31, 1998 and
1999 and the consolidated balance sheet data as of December 31, 1998, 1999
and 2000 from audited consolidated financial statements that are not included
in this Annual Report, which statements have also been prepared in accordance
with U.S. GAAP.  The selected financial
data set forth below should be read in conjunction with Item 5--Operating and
Financial Review and Prospects and the financial statements, including the
notes thereto, included elsewhere in this Annual Report.

| |                                                                                           |  | Year Ended December 31,                            |       
| | ----------------------------------------------------------------------------------------- |  | -------------------------------------------------- | ------
| |                                                                                           |  |                                                    |       
| |                                                                                           |  | 1998                                               |       
| |                                                                                           |  |                                                    |       
| |                                                                                           |  | (U.S. dollars in thousands, except per share data) |       
| | Consolidated
  Statement of Operations Data:                                              |  |                                                    |       
| | Revenues                                                                                  |  | $                                                  | 20,399
| | Cost of revenues                                                                          |  |                                                    | 8,680 
| | Gross profit                                                                              |  |                                                    | 11,719
| | Operating expenses:                                                                       |  |                                                    |       
| | Research and development, net                                                             |  |                                                    | 2,318 
| | Selling and marketing, net                                                                |  |                                                    | 6,153 
| | General and administrative                                                                |  |                                                    | 1,443 
| | Impairment of acquired intangibles                                                        |  |                                                    |       
| | Restructuring cost                                                                        |  |                                                    |       
| | In process research and development write off                                             |  |                                                    |       
| | Total operating expenses                                                                  |  |                                                    | 9,914 
| | Operating income (loss)                                                                   |  |                                                    | 1,805 
| | Other income (expenses), net                                                              |  |                                                    | (203  
| | Financial income, net                                                                     |  |                                                    | 18    
| | Net income (loss) before tax                                                              |  |                                                    | 1,620 
| | Provision for tax                                                                         |  |                                                    |       
| | Equity in loss of affiliate                                                               |  |                                                    |       
| | Net income (loss) before cumulative effect of 
  changes in accounting principle          |  |                                                    | 1,620 
| | Cumulative effect of changes in accounting 
  principle                                   |  |                                                    |       
| | Net income (loss)                                                                         |  | $                                                  | 1,620 
| |                                                                                           |  |                                                    |       
| | Net income (loss) per share:                                                              |  |                                                    |       
| | Basic                                                                                     |  | $                                                  | 0.42  
| | Diluted                                                                                   |  | $                                                  | 0.26  
| | Weighted average shares used in computing net 
  earning (loss) per share (in thousands): |  |                                                    |       
| | Basic                                                                                     |  |                                                    | 3,824 
| | Diluted                                                                                   |  |                                                    | 6,199 

5

---

---

| |                                                                                |  | December 31,                |        |     
| | ------------------------------------------------------------------------------ |  | --------------------------- | ------ | ----
| |                                                                                |  |                             |        |     
| |                                                                                |  | 1998                        |        | 1999
| |                                                                                |  |                             |        |     
| |                                                                                |  | (U.S. dollars in thousands) |        |     
| | Consolidated Balance
  Sheet Data:                                             |  |                             |        |     
| | Cash, cash equivalents and short term investments                              |  | $                           | 3,729  |     
| | Working capital                                                                |  |                             | 5,018  |     
| | Total assets                                                                   |  |                             | 12,966 |     
| | Long term loans and capital lease obligations, 
  including current maturities |  |                             | 141    |     
| | Total shareholders equity                                                     |  | $                           | 6,609  |     

3.B Capitalization and
indebtedness

Not required.

3.C
Reasons for the offer and use of proceeds

Not
required.

3.D
Risk Factors

Our
business operation is subject to various risks resulting from changing
economic, political, industry, business and financial conditions.  In addition, this Annual Report contains
various forward-looking statements that reflect our current views with respect
to future events and financial results. 
Below we attempt to identify and describe the principal uncertainties
and risk factors that in our view at the present time may affect our financial
condition, cash flows and results of operations and our forward-looking
statements.  Readers are reminded that
the uncertainties and risks identified below in this Annual Report do not
purport to constitute a comprehensive list of all the uncertainties and risks,
which may affect our business and the forward-looking statements in this Annual
Report.  In addition, we do not
undertake any obligation to update any forward-looking statements, whether as a result of new information, future
events or otherwise.

(a)     Risks
Relating to Market, Our Financial Condition and Shareholdings

We
have a history of losses, have been operating at a loss since the quarter
ending December 31, 2000 and we may not return to profitability in the future.  Since
the quarter ended December 31, 2000, we have been operating at a loss and as a
result have accumulated losses of $64.2 million as of December 31, 2002, $12.9
million of which was incurred in 2002. Given the market conditions, the
weakness in the technology sector and the uncertainty regarding the demand for
our products and our research and development and other expenses, we expect to
operate at a loss in 2003. We may not be able to return to and sustain
profitability in the future, and our operating results for future periods will
continue to be subject to numerous uncertainties and risks.  In order to return to and sustain
profitability, we will need, among other matters, to aggressively expand markets
for our new products while continuing to expand market share for our existing
products.  We cannot assure you that we
will be able to increase the sales of our products and revenues and return to
profitability.

6

---

---

The
economic outlook may adversely affect the demand for our current
products and the results of our operations.  The deterioration of the general economy in
the U.S. and worldwide began in 2002 and continued through 2002, which has
especially curtailed the business opportunities of technology companies.  Weak economic conditions have caused, and
may continue to cause, reductions in spending in technology markets in general,
including spending in digital video based products and services.  Consequently, there has been, and may continue
to be, an adverse impact on the demand for our products and services, which
has, and may continue to, adversely affect our sales and results of
operations.  In addition, predictions
regarding economic conditions have a low degree of certainty, and further
predicting the effect of the changing economy is even more difficult.  We may not accurately gauge the effect of
the general economy on our business.  As
a result, we may not react to such changing conditions in a timely manner that
may result in an adverse impact on our results of operations.  Any such adverse impact to the result of our
operations from a changing economy may cause the price of our ordinary shares
to decline further.

The
war in Iraq and the threat of terrorism worldwide are impacting the global
economy. Combined with the political unrest in Israel, this could have a
material adverse effect on our results of operations.  The war in Iraq, the threat of the use of
weapons of mass destruction and global terrorism are impacting the global
economy. The future course of the conflict in Iraq and its effect on the global
economy and the technology industry cannot be predicted. In addition, since
September 2000, the State of Israel and its inhabitants have been subjected to
repeated terrorist attacks. The hostilities between the State of Israel and the
Palestinians continued during the past year, with no end in sight to this
intense conflict. This conflict can have both direct and indirect impacts on
our business as a result of, among other things, military service obligations
of our key employees, changes in monetary and fiscal policies or the
willingness of customers outside Israel to buy our products, including demands
for additional assurances concerning availability of our products.

We
have experienced significant fluctuations in our results of operations at times
in the past and expect these fluctuations to continue. These fluctuations may
result in volatility in our share price.We have
experienced at times in the past and may in the future experience, significant
fluctuations in our quarterly and annual results.  Factors that may contribute to the fluctuations in our quarterly
results of operations include:

| |  | the timing
  of purchases of our products by system integrators and other large customers;                                                 
| | - | -------------------------------------------------------------------------------------------------------------------------------------------
| |  | the rate of
  acceptance of new products we introduce;                                                                                     
| |  | the loss of
  major customers;                                                                                                             
| |  | product
  introductions and other actions taken by our competitors;                                                                        
| |  | market
  acceptance of video-based Web services;                                                                                           
| |  | market acceptance
  of IP based video services;                                                                                            
| |  | changing
  networking standards in the digital video industry and our ability to
  anticipate and react to such changes in a timely manner;
| |  | changes in
  sales and distribution environments and costs;                                                                                
| |  | fluctuations
  in manufacturing yields and delays in product shipments;                                                                    
| |  | personnel
  changes;                                                                                                                       
| |  | changes in
  foreign exchange rates; and                                                                                                   
| |  | general
  economic conditions, particularly in those countries or regions where we sell
  our products.                                    

Historically,
the prices of video encoders and decoders and content authoring tools have
decreased over the life of individual products, while the complexity of new
product introductions has increased concurrently.  As a result, we have reduced prices for our products and we expect
to reduce prices in the future.  In
addition, we have increased research, development and marketing expenditures in
response to competitive conditions and the development of new technologies and
products, and we expect to increase such expenditures in the future.  Accordingly, investors should not rely on
the results of any past periods as an indication of our future
performance.  It is likely that in some
future periods, as occurred in the second quarter of 2002, our operating
results may be below expectations of public market analysts or investors.  If this occurs, our share price may drop.

The
trading price of our ordinary shares has been highly volatile, and may continue
to fluctuate significantly due to factors beyond our control.The trading price of our ordinary shares is and
will continue to be subject to significant fluctuations in response to numerous
factors, including:

7

---

---

| |  | the
  announcement of new products, services or service enhancements by us or our
  competitors;                                                          
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | quarterly
  variations in our or our competitors results of operations;                                                                                  
| |  | changes in
  earnings estimates or recommendations by securities analysts;                                                                                
| |  | perceptions
  of the digital media and networking industrys relative strength or weakness;                                                               
| |  | developments
  in our industry and change in demand for our products; and                                                                                 
| |  | general
  market conditions and other factors, including factors unrelated to our
  operating performance or the operating performance of our competitors.

We
expect this volatility to continue in the future.  In addition, any shortfall or changes in our revenues, gross
margins, earnings or other financial results could cause the price of our
ordinary shares to fluctuate significantly. 
In recent years, the stock market
has experienced significant price and trading volume fluctuations, which have
particularly affected the market price of many technology companies and which
may not be related to the operating performance of those companies.  Volatility in the price of stock of
companies in the digital media and networking industry has been particularly
high.  These broad market fluctuations
have affected and may continue to affect adversely the market price of our
ordinary shares.  In recent years, the
trading price of our ordinary shares has been highly volatile.  From January 2002 through June 19, 2003, the
price of our ordinary shares fell to a low of $1.4 from a high of $3.29.  The fluctuations and factors listed above,
as well as general economic, political and market conditions may further materially
adversely affect the market price of our ordinary shares.

We
may in the future be the target of securities class action or other litigation,
which could be costly and time consuming to defend.In the past, following a period of
volatility in the market price of a companys securities, securities class
action lawsuits have often been instituted against such companies.  We may in the future be the target of
similar litigation.  If such a lawsuit
were brought against us, regardless of its outcome, we would incur substantial
costs and our management resources would be diverted in defending such
litigation.

We
may not be able to raise additional financing for our future capital needs on
favorable terms, or at all, which could limit our growth and increase our
costs.We received net proceeds in the amount of
approximately $67 million from our secondary public offering in March 2000, and
we spent, or provided to be paid, approximately $37 million in cash as a
component of the consideration paid to acquire the core of Hi-TV in October
2000 and Viewgraphics in December 2000. 
It is probable that we will need to raise additional capital in the
future to continue our longer term expansion plans through acquisitions.  We cannot be certain that we will be able to
obtain additional financing on commercially reasonable terms or at all.  This could inhibit our growth and increase
our operating costs.

Holders
of our ordinary shares who are United States residents face income tax risks. There is a substantial risk that we are
a passive foreign investment company, commonly referred to as PFIC. Our
treatment as a PFIC could result in a reduction in the after-tax return to the
holders of our ordinary shares and would likely cause a reduction in the value
of such shares.  For U.S. Federal income
tax purposes, we will be classified as a PFIC for any taxable year in which
either (i) 75% or more of our gross income is passive income, or (ii) at least
50% of the average value of all of our assets for the taxable year produce or
are held for the production of passive income. 
For this purpose, cash is considered to be an asset, which produces
passive income. As a result of our substantial cash position and the decline in
the value of our stock, there is a substantial risk that we will be classified
as a PFIC under a literal application of the asset test described above, which
looks solely to the market value.  If we
are to be a PFIC for U.S. federal income tax purposes, highly complex rules
would apply to U.S. Holders owning ordinary shares.  Accordingly, you are urged to consult your tax advisors regarding
the application of such rules. United States residents should carefully read
Item 10E. Additional Information - Taxation, United States Federal Income Tax
Consequences for a more complete discussion of the U.S. federal income tax
risks related to owning and disposing of our ordinary shares.

Our
officers, directors and affiliated entities own a large percentage of our
ordinary shares and could significantly influence the outcome of actions.Our executive
officers, directors and entities affiliated with them, in the aggregate,
beneficially own approximately 25.47% of our outstanding ordinary shares.  In this regard, Festin Management Corp.,
with which Tom Wyler, our Chief Executive Officer and Chairman of the Board, is
affiliated, holds 25.06%; see Item 7A  major shareholders.  These shareholders, if acting together,
would be able to significantly influence all matters requiring approval by our
shareholders, including the election of directors and the approval of mergers
or other business combination transactions.

We
do not intend to pay dividends.  We have never declared or paid any cash dividends on our ordinary
shares.  We currently intend to retain
any future earnings to finance operations and expand our business and,
therefore, do not expect to pay any dividends in the foreseeable future.

8

---

---

(b)     Risks
Relating to Our Business

The
market for our products is highly competitive, and we may lose sales to our
competitors and be forced to lower the prices for our products, which may
result in reduced revenues.Competition in our industry is intense, and we
expect competition to increase.  Demand
for digital video products has grown rapidly over recent years, and, as a
result, competition among providers of digital video products has substantially
increased in the areas of digital video transmission and delivery and content
creation.  To compete effectively, we
must continue to respond promptly and effectively to changing customer
preferences, feature and pricing requirements, technological change and
competitors innovations.

Our
principal competitors in the digital video and streaming markets include
VideoTele Inc., Tandberg Television ASA, Harmonic Inc., Minerva Inc., VBrick
Systems Inc., Amnis Systems (formerly Optivision, Inc.), Winnov Inc., Pinnacle
Systems Inc., Sigma Designs, Inc., Matrox, Vela Research, Inc., Darim Vision
Ltd., Canopus, SkyStream Inc., DVS and Viewcast Inc.  We also expect to see increasing indirect competition from
vendors of software encoders and decoders like Digital Rapids, Ligos and
Intervideo.  Some of our actual and
potential competitors may have longer operating histories, greater name
recognition, access to larger customer bases and significantly greater
financial, marketing, technical and other resources than we do.  Our competitors also sell products that
provide some of the benefits of the products that we sell, and we could lose
sales to our competitors.  Moreover, the
digital video products industry is undergoing a period of consolidation in
which companies, including some of our competitors, are participating in business
combinations.  These combinations may result
in the emergence of competitors who have greater market share, customer base,
sales force, product offering, technology expertise and/or marketing expertise
than we do.  As a result, our
competitors may be able to adapt more quickly to new or emerging technologies
and changes in customer requirements or to devote greater resources to the
promotion and sale of their products than we can.  Thus, we cannot assure you that we will be able to compete
successfully against current and future competitors, or that we will be able to
make the technological advances necessary to improve or even maintain our
competitive position or that our products will achieve market acceptance.

In
addition, we expect price competition to escalate in the video streaming
industry.  We have consistently
attempted to minimize the effect of price reductions in the market by
introducing more sophisticated products at the top of our product line, and
thereby attempt to maintain higher selling prices.  However, competition in the future may force us to lower product
prices and add new products and features at lower prices, or we may otherwise
be unable to introduce new products at higher prices.  We cannot assure you that we will be able to compete successfully
in this kind of price competitive environment, and lower prices and reduced
demand for our products would reduce our ability to generate revenue.  Failure by us to mitigate the effect of
these pressures through cost reduction of our products or changes in our
product mix could have a material adverse effect on our business, financial
condition and results of operations.

We
have a limited backlog of orders and have to plan production and inventory
levels on unpredictable ordering patterns. 
Maintaining sufficient inventory levels to meet anticipated demand
increases the risk of inventory obsolescence and associated write-offs.The timing and volume of orders are difficult to
forecast for each quarter, as a substantial portion of our sales are booked and
shipped in the same quarter pursuant to purchase orders.  We have a limited backlog of orders for our
products and must maintain or have available sufficient inventory levels to
satisfy anticipated demand on a timely basis. 
Maintaining sufficient inventory levels to assure prompt delivery of our
products increases the risk of inventory obsolescence and associated
write-offs.  A shift in demand could
also result in inventory write-offs, which could harm our financial performance.

In
addition, the ordering patterns of some of our large customers have been
unpredictable in the past and we expect that customer ordering patterns will
continue to be unpredictable.  In view
of the foregoing, we must plan our production and inventory levels based on
internal forecasts of customer demand, which is inherently unpredictable, may
fluctuate substantially and sometimes varies substantially from early estimates
provided by customers to us for planning purposes.

We
derive a significant portion of our revenues from one type of product, and the failure of this type of product to
meet market demands could have a disproportionate impact on our revenues and
income.Our MovieMaker
encoder product family accounted for 47% of our revenues in 2000, 42% of our
revenues in 2001 and 52% of our revenues in 2002.  We expect that this product family will continue to account for a
significant portion of our revenues in the foreseeable future.  If this product fails to match the price,
availability, quality or other features of competing products or to otherwise
meet our expectations with respect to market demand, our business will
suffer.

9

---

---

We
depend on several large customers and the loss of one or more of these
customers, or a significant decrease in revenue from any of these customers,
could have a disproportionate impact on our revenues and income.Historically, a substantial portion of our
revenues has come from large purchases by a small number of customers.  For example, our top three customers in 2000
accounted for approximately 30% of our revenues, our top three customers in
2001 accounted for 25% of our revenues and our top three customers in 2002
accounted for 30% of our revenues.  In
2002, sales to SeaChange Corporation accounted for approximately 14% of our
revenues, sales to Cisco Networks accounted for approximately 8% of our
revenues, and sales to Prediwave accounted for approximately 8% of our
revenues.  We expect to continue to
depend on sales to a small number of customers.  We have a limited number of long-term purchase agreements with
our top customers, and as such, we have a limited number of commitments from
our top customers to purchase specific quantities of products. We cannot assure
that we will be able to continue those agreements under current or future
market conditions.  We expect that our
largest customers will vary from period to period.  If we lose, or if purchases of our products were significantly
reduced by, one or more of our large customers and we fail to add new customers
that generate significant revenues, our results of operations could be
seriously harmed.  For example, the
decrease in revenues during 2002 was partly related to a substantial decrease
in purchase orders from our large customers, including Gilat, Harmonic, SeaChange
and Cisco.  In addition, the loss of
purchase orders of MediaPump products from SeaChange starting from the second
quarter of 2002 resulted in a significant reduction of our revenues from the
second quarter of 2002 and continued to affect our sales and results of
operations in the quarters that follow.

Our
long sales cycle depends on factors beyond our control and may cause revenues
to vary significantly.Sales of our streaming products, which generally
must be integrated within a larger system, require an extended sales
effort.  The period from an initial
sales call to the receipt of a purchase order for such products typically
ranges from six to twelve months, and can be longer.  Also, because our products are often used as part of a larger project,
the timing of an order for our products is often dependent upon the timing of
the projects, which is beyond our control. 
In addition, due to the operating procedures in many large organizations
considering the purchase of our products, an extended period of time may be
required for technical evaluation to be completed and capital expenditure
authorization to be obtained within the customer.  Accordingly, if a forecast of revenues from a specific customer
for a particular period is not realized in that period, our operating results
for such period will suffer.

We
depend on third parties to distribute and market our products.  If we cannot retain effective distributors
or fail to develop new distributor relationships, we may be unable to effectively
market and distribute our products.A significant portion of our sales efforts
worldwide is conducted through a network of independent distributors.  Our combined sales to three of these
distributors accounted for approximately 13% of our revenues in 2000,
approximately 13% of our revenues in 2001 and approximately 14% of our revenues
in 2002.  We are unable to predict
whether and the extent to which some of these distributors will be successful
in marketing and selling our products in the future.  While we have a policy of using only distributors who do not
distribute competing products, we have experienced, and may experience in the
future, sales by our distributors of products that compete with our products.  In such cases, we may have to seek new
distributor relationships, and we may not be able to establish relationships on
the same terms as the prior relationships. 
Furthermore, distributors may terminate their relationships with us upon
short notice with little or no penalty.

Our
future performance also depends on our ability to attract additional
distributors who will be able to market and support our products effectively,
especially in markets in which we have not previously been active.  Effective distributors must possess sufficient
technical, marketing and sales resources and must devote these resources to a
lengthy sales cycle and subsequent first-line customer support.  We may not be able to retain our current
distributors and may not be able to recruit additional or replacement
distributors with sufficient technical expertise in the networking and video
content fields.  The loss of one or more
of our major distributors, especially in a key market, or the failure by one or
more major distributors to adequately provide customer support could harm our
business.

We
believe its becoming increasingly important for our success to develop
relationships with several large original equipment manufacturers or OEMs of
video server equipment with technical and support expertise will be
increasingly important for our success. 
We presently have a limited number of OEM relationships and we may not
be able to maintain these relationships. 
Moreover, we may not be able to develop new OEM relationships, on
favorable terms or at all.  Our failure
to retain existing or to develop new OEM relationships will have a material
adverse effect on our ability to sell our products and our operation results.

10

---

---

If the digital video market does not grow as we
expected, the demand for our products and technology may continue to decline
and our revenue will decrease.Digital
video products generally, and digital video streaming products and tools
specifically, are part of a rapidly evolving market.  Our growth will depend on our ability to predict which segments
of that market are most likely to succeed and to successfully penetrate those
segments.  We have devoted substantial
effort and expense to the development of new products based on our prediction
of the market trends, and our future growth will depend on our ability to successfully
market these products.  The demand for
these products depends on the rate and level of penetration of networked video
applications and digital video equipment into the mass market generally.  Because of the early stage of development of
the digital video market, the demand for, and market acceptance of, our
products is subject to a high degree of uncertainty.  If market growth rates do not meet our expectations, or if we are
unsuccessful in identifying and penetrating those segments of the digital video
market which provide the greatest opportunity for growth, our business will
suffer.   In addition, the
general weak economic conditions have had an adverse impact on the industry and
on the demand of our products.  If the
economic conditions persist and demand does not increase, our revenues will
continue to decline, and our business will continue to suffer.

The digital video and streaming market is
characterized by rapid technological changes and multiple evolving
standards.  If we fail to enhance our
existing products, develop new and more technologically advanced products and
successfully market these products, the results of our operations will suffer.  The markets for our products are
characterized by rapidly changing technology, evolving industry standards and
frequent new product introductions.  We
believe that our future success will depend on our ability to maintain
expertise in the networked video technologies, enhance our existing products
and introduce new products and features to meet changing customer requirements
and evolving industry standards.  Our
present products are based on the MPEG standard. Although MPEG has evolved as
the defacto standard for compression and decompression of digital video,
we cannot assure you that the current de facto standards will not be replaced
in the future.  In addition, we, or our
competitors, may announce products that have the potential to shorten the life
cycle of, or replace, our products.  We
have made such announcements in the past and may do so in the future.  Such announcements could cause customers not
to buy our products or to defer decisions to buy our products.  In addition, we cannot assure you that products
or technologies developed by others will not render our products or technologies
non-competitive or obsolete.

Our
future success also depends upon our ability to enhance our existing products
and develop, launch and market new technologies and products in a
cost-effective and timely fashion.  We
have devoted, and will continue to devote, substantial effort and expenses to
the development of new technologies and products.  However, we cannot assure you that we will be able to complete
testing and successfully launch our new products.  We have in the past experienced problems developing new products
and we cannot assure you that such problems can be avoided in the future.  For example, in the second half of 1997, we
experienced problems which resulted in a temporary decline in our manufacturing
yields and delays in product shipments for several weeks.  If we cannot develop and launch our new
products, or if we fail to achieve market acceptance of our new products, our
future growth would suffer.

Our products could contain defects, which would
reduce sales of those products or result in claims against us.We develop complex and evolving
products.  Despite testing, errors may
be found in existing or new products. 
Reliability, quality or compatibility problems with our products could
significantly delay or reduce market acceptance of our products, could require
the devotion of significant time and resources to addressing errors, could
divert our engineering and other resources from other tasks and development
efforts, and could damage our reputation and adversely affect our ability to
retain our existing customers and to attract new customers.  We could also be subject to material claims
by customers.

We depend on a limited number of third parties to
manufacture, distribute and supply critical components of our products and we
may be unable to operate our business if these parties fail to perform their
obligations.We depend upon
sole source suppliers for key components used in our products.  These key components include, for
example:

11

---

---

| |  | Various modules,
  which are integrated in our new generation system, the MGW5100 and are as
  follows: Switch by PTI (Performance Technologies Inc.), host by Motorola
  backplane and alarm board by Kaparel Corporation, Pentium module by Jumptech
  Adastra and Compact Pci platform by EPS (Israel) TECH 1992 Ltd.;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Digital
  Signal Processes or DSPs manufactured by Equator Inc., which are used in our
  MGW 2400;                                                                                                                                                                                                                       
| |  | Video
  compression chips manufactured by LSI Logic;                                                                                                                                                                                                                                                                     
| |  | Audio
  compression chips manufactured by Crystal Semiconductor Corporation, or
  Crystal, a subsidiary of Cirrus Logic, which are included in our decoders;                                                                                                                                                             
| |  | Motorola,
  Inc.s DSPs, which are included in our decoders and encoders; and                                                                                                                                                                                                                                            
| |  | MP503
  manufactured by Cyclone Microsystems, the suppliers of one of the MediaPump
  hardware platforms.                                                                                                                                                                                                                

We may have
sole source suppliers for additional products in the future.

We
purchase these sole source components pursuant to purchase orders placed from
time to time.  We do not carry
significant inventories of these sole source components and we have no
guaranteed supply arrangements or other long-term agreements.  The lack of guaranteed supply arrangements
can result in delays in obtaining components from time to time.  The time and resources that these third
parties devote to our business is not within our control.  We cannot be sure that these parties will
perform their obligations as expected or that any revenues, cost savings or
other benefits will be derived from the efforts of these parties.  If any of these parties breaches or
terminates its agreement with us or otherwise fails to perform its obligations
in a timely manner, the manufacture of our products may be delayed or
cancelled.  If any of these events occur,
we may be required to look for alternative sources of supply for our sole
source components, which may be time consuming and we may incur additional
expenses, which in turn may affect our sales and operation results.

We depend on a limited number of key personnel who
would be difficult to replace, and if we lose the services of these individuals
or cannot hire additional qualified personnel, our business will be
harmed.Our continued growth
and success largely depend on the managerial and technical skills of key
technical, sales and management personnel. We have experienced
higher rate of turnover in 2001 than at other times in our history, and changes
to the composition of our board of directors and senior management team,
including the change of our chief executive officer and management of our U.S.
operations. If any of the current members
of the senior management team are unable or unwilling to continue in our
employ, our results of operations could be materially and adversely
affected.  Our success also depends to a
substantial degree upon our ability to attract, motivate, and retain other
highly qualified personnel.  The
technology associated with digital video is at a relatively advanced stage, and
there are many competitors in this area. 
Consequently, there is considerable competition for services of
technical, sales, management and engineering personnel.  In addition, our U.S. operations are
largely based in Silicon Valley, a highly competitive marketplace.  Therefore, we may be at a disadvantage to
the extent potential employees may favor larger, more established employees,
and we may not be able to retain our
current personnel, and obtain the service of additional qualified personnel if
and when needed.

Cost-reduction efforts may adversely impact our
productivity and service levels.During 2002, we continued
implementing various cost-control measures affecting various aspects of our
business operations. In September 2001, we reduced our workforce by
approximately 19% of out total workforce at that time.  During 2002 we performed additional
reductions mainly in our U.S based research and development workforce. Given
current economic conditions and our declining revenues and accumulated losses
over the last several quarters, we may in the future be required to take additional
cost-saving actions to reduce our losses and to conserve cash. The failure to
achieve such future cost savings could have a material adverse effect on our
financial condition. On the other hand, even if we are successful with these
efforts and can generate the anticipated cost savings, these actions may
adversely impact our employees morale and productivity, the competitiveness of
our products and business, and the results of our operations.

Our future earnings may be reduced because of the
merger with Viewgraphics.Our
acquisition of Viewgraphics took place in December 2000 and has been treated as
a purchase for accounting purposes. 
This created expenses in our future statements of operations for the
years 2000, 2001 and 2002, that we would not have otherwise incurred, which
could have an adverse effect on the market price of our ordinary shares. We
will continue to amortize deferred compensation in connection with the
merger.  This amortization will reduce
earnings over the next year.

We may continue to seek expanding our business
through acquisitions that could result in diversion of resources and  incurrence of additional expenses, which
could disrupt our business and harm our financial condition.We may in the future continue to
pursue acquisitions of businesses, products and technologies, or the
establishment of joint venture arrangements, that could expand our
business.  The negotiation of potential
acquisitions or joint ventures as well as the integration of an acquired or
jointly developed business, technology, service or product could cause
diversion of managements time as well as our resources.  Future acquisitions could result in:

12

---

---

| |  | additional
  operating expenses without additional revenues;
| | - | ------------------------------------------------------------
| |  | potential
  dilutive issuances of equity securities;        
| |  | the
  incurrence of debt and contingent liabilities;        
| |  | amortization
  of goodwill and other intangibles;           
| |  | research and
  development write-offs; and                  
| |  | other
  acquisition-related expenses.                       

Acquired
businesses or joint ventures may not be successfully integrated with our
operations.  If any acquisition or joint
venture were to occur, we may not receive the intended benefits of the
acquisition or joint venture.  If future
acquisitions disrupt our operations, our business may suffer.

Our proprietary technology is difficult to protect
and unauthorized use of our proprietary technology by third parties may impair
our ability to compete effectively.Our
success and ability to compete depend in large part upon protecting our
proprietary technology including both hardware and software components of our
products.  We currently rely on a
combination of patent, trade secret, trademark and copyright laws,
nondisclosure and other contractual agreements and technical measures to
protect our proprietary rights.  We
cannot assure you that any patents will be issued to us as a result of current
or future patent applications or that patents issued to us will not be
invalidated, circumvented or challenged. 
In addition, we cannot assure you that the rights granted under any such
patents will provide us competitive advantages.  We cannot assure you that any patents issued to us will be
adequate to stop unauthorized third parties from copying our technology,
designing around the patents we own or otherwise obtaining and using our
products, designs or other information. 
Moreover, we cannot assure you that others will not develop technologies
that are similar or superior to our technology.  Additionally, our products may be sold in foreign countries that
provide less protection to intellectual property than that provided under U.S.
or Israeli laws.

Because our products may be subject to claims of
infringement on the intellectual property rights of third parties, our business
will suffer if we are sued for infringement or cannot obtain licenses to these
rights on commercially acceptable terms.We are subject to the risk of adverse claims and litigation
alleging that we infringe the intellectual property rights of others.  Many participants in the digital video
encoding, decoding and video streaming industries have an increasing number of
patents and patent applications and have frequently demonstrated a readiness to
pursue litigation based on allegations of patent and other intellectual
property infringement.  All of our
products rely on technology that could be the subject of existing patents or
patent applications of third parties. 
Third parties may assert infringement claims in the future with respect
to our current or future products. 
These claims may require us to enter into license arrangements or result
in protracted and costly litigation that would require significant expenditures
of time, capital and other resources by us and our management regardless of the
merits of these claims.  Any necessary
licenses may not be available or if available, may not be obtainable on
commercially reasonable terms.  If we
cannot obtain all necessary licenses on commercially reasonable terms, we may
be forced to stop selling all or some of our products, and our business would
be harmed.

The prices of our products may become less
competitive due to foreign exchange fluctuations.Foreign currency fluctuations may affect the prices of
our products.  Our prices in all countries
are incurred or determined in dollars. 
If there is a significant devaluation in a specific country, the prices
of our products will increase relative to the local currency and may be less
competitive.  Also, we cannot be sure
that our international customers will continue to place orders incurred or
determined in dollars.  If they do not,
our reported revenue and earnings will be subject to foreign exchange
fluctuations.

Business interruptions could adversely affect our
business.Our operations are
vulnerable to interruption by fire, earthquake, power loss, telecommunications
failure and other events beyond our control, especially because our U.S.
facilities are located in the State of California .  We do not have a
detailed disaster recovery plan. In the event these blackouts, earthquake or
other interruptions occur, they could disrupt the operations of our affected
facilities.  In addition, we do not
carry sufficient business interruption insurance to compensate us for losses
that may occur and any losses, and any potential damages resulting from such
interruptions could have a material adverse effect on our business.

13

---

---

(c)     Risks Relating to Operations in Israel

A continuing deterioration in the economic conditions
in Israel may adversely affect our financial condition and results of
operations.  We are
incorporated and currently derive a portion of our revenues from markets within
the State of Israel. Primarily due to the global economic downturn and Israels
security and political situation, the Israeli economy has slipped into
recession from 2000 and has not yet shown sign of recovery. The rate of
unemployment is rising, consumer spending has decreased and many businesses are
experiencing financial difficulties. A continuing deterioration in the economic
conditions in Israel may adversely affect usage patterns of our services and
the ability of our customers to pay for our services, which would adversely
affect our financial condition and results of operations. If the economic
deterioration in Israel continues, it may also affect the ability of Israeli
banks to provide us with financing on reasonable terms and conditions, should
we need it in the future.

Potential political and military instability in
Israel may adversely affect our results of operations.  Our principal offices and a significant
portion of our operations are located in Israel.  Accordingly, political, economic and military conditions in
Israel directly affect our operations. 
Since the establishment of the State of Israel in 1948, a number of
armed conflicts have taken place between Israel and its Arab neighbors.  A state of hostility, varying in degree and
intensity, has led to security and economic problems for Israel.  Since October 2000, there has been a
significant deterioration in the relationship between Israel and the
Palestinian Authority and, which has resulted in increased violence. In the
last two years, hostilities between Israel and the Palestinian Authority have
substantially increased.  These
hostilities include terrorist acts in Israel and military operations in the
West Bank and Gaza.  We could be
adversely affected if these hostilities intensify or spread to additional areas
in Israel. We cannot assure you that we are fully prepared for every disaster
or emergency situation or that we could recover fully from such an occurrence,
and we cannot predict the effect on us of any such circumstances.  Further deterioration of the situation into
a full scale armed conflict might require more widespread military reserve
service by some of our employees, which may have a material adverse effect on
our business.  In addition, several
countries still restrict business with Israel and Israeli companies.  These restrictive laws and policies may
seriously harm our operating results, financial condition or the expansion of
our business.

Our results of operations may
be negatively affected by the obligation of key personnel to perform military
service.Some of our executive officers and employees in
Israel, including Zvi Halperin, our president and chief financial officer are
obligated to perform up to 36 days, or longer under certain circumstances, of
military reserve duty annually. Additionally, all such reservists are subject
to being called to active duty at any time under emergency circumstances. Our operations could be disrupted by the absence
for a significant period of one or more of our executive officers or key
employees due to military service.  Any
disruption in our operations would harm our business.

Because most of our revenues
are generated in U.S. dollars but a portion of our expenses in Israel are
incurred in New Israeli Shekels, our results of operations may be seriously
harmed by inflation in Israel and currency fluctuations.We generate most of our revenues in U.S. dollars but incur a portion of
our expenses in NIS.  As a result, we
are exposed to risk to the extent that the rate of inflation in Israel exceeds
the rate of devaluation of the NIS in relation to the dollar or if the timing
of devaluation lags behind inflation in Israel.  In either event, the dollar cost of our operations in Israel will
increase and our dollar-measured results of operations will be adversely
affected.  Specifically, the inflation
rate in Israel was approximately 0% in 2000, approximately 1.4% in 2001 and
approximately 6.5% in 2002.  At the same
time the devaluation of the NIS against the dollar was approximately (2.8)% in
2000, approximately 9.3% in 2001 and approximately 7.3% in 2002.  As a result of this differential, we
experienced an increase in the dollar costs of operations in Israel in 2000,
and a decrease in 2001 and 2002, all of which did not materially affect our
results in such periods.  The
fluctuations in the dollar costs of our operations in Israel related primarily
to the costs of salaries in Israel, which are paid in NIS and constitute a
portion of our expenses.  We cannot
assure you that we will not be materially adversely affected in the future if
inflation in Israel exceeds the devaluation of NIS against the dollar or if the
timing of such devaluation lags behind increases in inflation in Israel.  Our operations also could be adversely
affected if we are unable to guard against currency fluctuations in the future.
 Accordingly, we may enter into currency hedging transactions to decrease
the risk of financial exposure from fluctuations in the exchange rate of the
dollar against the NIS.  These measures,
however, may not adequately protect us from material adverse effects due to the
impact of inflation in Israel.

14

---

---

The government programs and tax
benefits that we currently participate in or receive require us to meet several
conditions and may be terminated or reduced in the future, which would increase
our costs.We receive grants from the Office of the Chief
Scientist, or OCS, of the Israeli Ministry of Industry and Trade for research
and development programs that meet specified criteria.  In addition, we received grants for overseas
marketing from the Israel Fund for the Encouragement of Marketing Activities,
or the Marketing Fund.  We also receive
tax benefits under Israeli law for capital investments that are designated as
Approved Enterprises.  To maintain our
eligibility for these programs and tax benefits, we must continue to meet
conditions, including paying royalties with respect to grants received and
making specified investments in fixed assets. 
In addition, some of these programs restrict our ability to manufacture
particular products or transfer particular technology outside of Israel.  If we fail to comply with these conditions
in the future, the benefits received could be cancelled.  We could also be required to refund any
payments previously received under these programs of up to 300% of the granted
funds, or pay increased taxes.  Through
December 2002, we received an aggregate of $3.9 million in grants from the
OCS.    Since 1992, grants from the Marketing
Fund have totaled $2.8 million, although no new grants were received in 2000,
2001 or 2002.

The Israeli Law for the Encouragement of Capital
Investment, 1959 provides that no new benefits may be granted after May
2003.  We expect that this date could be
extended, as has been the case in the past. There can be no assurance that new
benefits will be available after May 2003. We have already been granted
approved enterprise status under this Law, the deadline does not have any
affect on such status or on the benefits we receive.We also receive
funding as part of our participation in the Office of Chief Scientist Magnet
program operated by Israels Ministry of Industry and Trade and under a series
of research and development programs sponsored by the Commission of the
European Union.  Through
December 31, 2002, we have received an aggregate of $3.4 million in grants
from the Magnet program.  In 2001 and
2002, grants from the OCS, the Magnet and the European Union programs totaled
$4 million.  The Israeli government has
reduced the benefits available under these programs in recent years and has
indicated that it may reduce or eliminate these benefits in the future.  These programs and some tax benefits may not
continue in the future at their current levels or at any level.  From time to time, we submit requests for
new grants from the OCS and the Magnet program and for expansion of our
Approved Enterprise programs (see Israeli Taxation--Item 10.E) or for new
programs.  These requests might not be
approved.  The termination or reduction
of these grants and tax benefits could seriously harm our business, financial
condition and results of operations.

Israeli courts might not
enforce judgments rendered outside of Israel, which may make it difficult to
collect on judgments rendered against us.We are incorporated in Israel.  Some of our directors, officers and the
Israeli experts named herein are not residents of the United States and some of
their assets and our assets are located outside the United States.  Service of process upon our non-U.S.
resident directors, officers or the Israeli experts named herein and
enforcement of judgments obtained in the United States against us, and our
directors and executive officers, or the Israeli experts named herein, may be
difficult to obtain within the United States.

We have been informed by our Israeli legal
counsel, that there is doubt as to the enforceability of civil liabilities
under U.S. securities laws in original actions instituted in Israel.  However, subject to certain time
limitations, an Israeli court may declare a foreign civil judgment enforceable
if it finds that all of the following terms are met:

| |  | the judgment
  was rendered by a court which was, according to the laws of the state of the
  court, competent to render the judgment;                                                                          
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the judgment
  is no longer appealable;                                                                                                                                                                         
| |  | the
  obligation imposed by the judgment is enforceable according to the rules
  relating to the enforceability of judgments in Israel and the substance of
  the judgment is not contrary to public policy; and
| |  | the judgment
  is executory in the state in which it was given.                                                                                                                                                 

Even
if the above conditions are satisfied, an Israeli court will not enforce a
foreign judgment if it was given in a state whose laws do not provide for the
enforcement of judgments of Israeli courts (subject to exceptional cases) or if
its enforcement is likely to prejudice the sovereignty or security of the State
of Israel.  An Israeli court also will
not declare a foreign judgment enforceable in the occurrence of any of the
following:

| |  | the judgment
  was obtained by fraud;                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | there was no
  due process;                                                                                                                                         
| |  | the judgment
  was rendered by a court not competent to render it according to the laws of
  private international law in Israel;                                   
| |  | the judgment
  is at variance with another judgment that was given in the same matter
  between the same parties and which is still valid; or                       
| |  | at the time
  the action was brought in the foreign court a suit in the same matter and
  between the same parties was pending before a court or tribunal in Israel.

15

---

---

Anti-takeover provisions could negatively impact our
shareholders.  The Israeli
Companies Law provides that an acquisition of securities in a public company
must be made by means of a special tender offer, if as a result of the
acquisition the purchaser would hold 25% or more of the voting rights in a
company.  This rule does not apply if at
the time of acquisition there is already a holder of 25% or more of the voting
rights in the company. Similarly, the Israeli Companies Law provides that an
acquisition of securities in a public company must be made by means of a
special tender offer, if as a result of the acquisition the purchaser would
hold more than 45% of the voting rights in a company.  This rule would not apply, if at the time of the acquisition
there is a holder of more than 50% of the voting rights in the company.

Pursuant to
the Israeli Companies Law, if following any acquisition of shares of a public
company or of a class of shares of a public company, the purchaser holds more
than 90% of the companys shares or more than 90% of any class of the companys
shares, then the purchaser must make a tender offer for all of the remaining
shares of the company or of the particular class of shares of the company,
which procedure is referred to as a full tender offer. In the event that
shareholders who did not respond favorably to the tender offer held less than
5% of the issued share capital of a company, or less than 5% of the issued
class of shares of a company, the holders of all the remaining shares of such
company are obligated to transfer their shares in the company to the acquirer
at the tender offer price. In the event a full tender offer is accepted in
accordance with the mandatory sale procedure described above, any offeree may
petition the relevant Israeli court, within three months as of the date of
acceptance, to declare the price paid for the companys shares to be less than
their fair value, and obligate the offeror to pay the shareholders the fair
value of the shares. Such petition may be filed as a class action. Furthermore,
the Israeli Companies Law provides that as long as a shareholder in a public
company holds more than 90% of the Companys shares or class of shares, such
shareholder shall be precluded from purchasing any additional shares of that
type other than through the required tender offer.

Item 4. Information
on the Company

4. A History
and development of the company

Company overview

Optibase was founded and incorporated in the
State of Israel in 1990.  Our principal
executive offices are located at 2 Gav Yam Center, 7 Shenkar Street,
Herzliya 46120, Israel, and our telephone number at that location is 972-9-970-9288.  Our website is located at www.optibase.com. Optibase is subject to the provisions of the
Israeli Companies Law, 1999, or the Companies Law.  Our U.S. subsidiary, Optibase, Inc., is located at 1250 Space
Park Way, Mountain View, CA 94043.

We provide
high-quality, cost-effective products that enable the preparation and delivery
of digital video based on MPEG and Windows MediaTM over ATM, DVB,
the Internet protocol (IP), and other packet-based networks.  MPEG is the Motion Picture Expert Group that
makes standards for video compression. 
We have created a breadth of product offerings used in applications such
as delivery of video over broadband networks, digital video archiving, distance
learning and business television.  Due
to general market conditions, we experienced a decrease in our level of
revenues in recent years, from $30.7 million in revenues in 2000 to $29.4
millions in revenues in 2001 and $20.4 million in revenues in 2002.  At the same time, our net loss has decreased
to a net loss of $12.9 million in 2002 from a net loss of $39.1 million in 2001
after increasing from a net loss of $8.96 million in 2000.  The change was mainly a result of our efforts to reduce operating expenses and improve
financial performance.  We
continue to operate at loss as of March 31, 2003.

Digital video technologies have emerged to
address the inherent limitations of analog video technologies.  The advantages of digital video
technologies, combined with the proliferation of digital networks and their
increased bandwidth, allow for the incorporation of digital video into various
Web-based services.  Broadband network
access for the home and office is increasing at a rapid rate. According to MRG
IP/Broadband Video market research from April 2003, by 2006 47 million homes
all over the world will be able to receive broadcast TV services from a Telco,
and over 8 million will subscribe to receive TV services. According to Cahners
In-Stat group, by 2005 55 million homes in North America will be able to
receive broadcast TV services from a Telco and over 12 million will subscribe
to receive TV services. According to In-Stat Group, the market for Business
Oriented Streaming Media Equipment will exceed $12 billion in 2006.

16

---

---

Our in-depth understanding of network protocols
has allowed us to develop real-time MPEG digital video transfer products.  In 1992, we introduced our first decoder, PCMotion, which allowed high-quality
viewing of MPEG-1 streams on stand-alone personal computers, or PCs.  In 1993, we became one of the first companies
to offer a real-time MPEG-1 encoder, MPEG
Lab Pro.  MPEG-2
specifications were substantially finalized in 1993.  By 1995, we had released our first MPEG-2 decoder and, in 1996,
our first MPEG-2 encoder.  Since 1993, we have produced content creation
tools.  In 1995, we introduced our video
CD content creation tool.  We further
developed our content creation products by introducing our MPEG-based DVD
content creation tool DVDFab in 1998. 
Since 1996, we have combined our extensive networking and MPEG expertise
to introduce a series of video networking products.  In the first quarter of 2000, we released MPEG ComMotion Pro, a scalable, Web-based
networking software application enabling the transmission of MPEG-1 and MPEG-2
digital video and MP3 digital audio over broadband networks, and in November
2000, we released our MGW 2000, the first product of our new MGW product line
which provides streaming media gateway solutions for enterprises and broadband
markets.  In December 2002, we released
the MGW 5100, a carrier class product that enables encoding, transcoding and
streaming of video over broadband IP networks. With the acquisition of
Viewgraphics in the year 2000, two main new product families were added to our
product portfolio  the MediaPump 503 DVB to PCI interface product line and the
VideoPump uncompressed SDI to PCI interface products. During 2001, the
MediaPump was redesigned and enhanced, and an entirely new and improved product
family, the MediaPump 533 was introduced. We also introduced the MGW 3100
DVB/IP Gateway system, based on the MediaPump products. In the third quarter of
2002, due to the loss of SeaChange as a customer of our MediaPump products and
after assessing markets conditions, we decided to cease additional research and
development efforts for the MediaPump, VideoPump and the MGW 3100 product
lines. We also decided to shut down the VideoPump and MGW 3100 product lines,
while continuing to support and sell the MediaPump.

We sell our products through a combination of a
direct sales force, system integrators, independent distributors and value
added resellers, or VARs.  A key element
of our sales and marketing strategy is to cultivate strategic relationships,
similar to our relationships with Cisco Systems, Inc., SeaChange, Prediwave,
Harmonic, and Oracle Corp , to promote reference sales with the potential for
significant revenue impact.  Our
streaming and content creation products are used by a diverse group of system
integrators and end-users including Cisco, Gilat Satellite Networks, NEC, IBM
Corporation and SeaChange International Inc.

Our headquarters, including research and
development, selling and marketing, finance and general management and
administration personnel, are located in Israel.  We established Optibase, Inc., a wholly owned subsidiary, in 1991
as a California corporation to manage our North American sales, marketing and
customer support activities.    In April
1997, Optibase, Inc. relocated to San Jose, California and has relocated in
2001 to Mountain View, California to the former offices of Viewgraphics, in
part to maintain a closer proximity with potential customers and system
integrators in related sectors.  We maintain
our business development and sales activities in Europe through local employees
residing in certain European countries. 
We have such offices in Austria and France, while the activity in other
countries is managed directly from Israel. 
In 1999 and 2000 we established offices in Japan and in China to
cultivate closer relationships with local sales force and potential system
integrators and expand our business development activities in the local market.

Capital
Expenditures for the Past Three Years

In October
2000, we acquired the core team of the HiTV unit from ECI Telecom.  The acquisition consisted of acquisition of
certain assets, co-ownership of certain technologies, permanent royalty free
license of other technologies and the transfer of eight employees to
Optibase.  The people and technologies
acquired in this transaction serve as the basis for one of our key future
product lines  the MGW 5100.  We paid
$3.75 million in connection with this acquisition and assumed certain liabilities
related to the acquired activity. During the quarter ended September 30, 2001,
we wrote down impaired intangibles related to the acquisition totaling $2.2
million.

In November
2000, we signed an agreement with a privately held company called Mobixell
Networks Inc., or Mobixell pursuant to which we granted Mobixell a license to
use certain of our MPEG-4 technologies for $300,000, and ommitted to invest
through one of our subsidiaries at least $1 million in its first round of
financing. In December 2000, we invested $1.064 million in Mobixells Series A
Preferred shares financing round and received shares of Mobixell representing
10.90% of its equity on a fully diluted basis. 
Mobixell was founded by Amir Aharoni, our former President and Chief
Operating Officer, and Yehuda Elmaliach, our former Chief Technology Officer,
to develop rich-media infrastructure platforms for mobile carriers. As of March
31, 2003, based on updated information and revised internal estimates, the
Company has decided to adjust downward the value of its investment in Mobixell
by its full amount, totaling $1.36 million.

17

---

---

In
December 2000, we acquired Viewgraphics Incorporated, a privately held company
based in Mountain View, California and a provider of hardware and software
products for Digital Media infrastructure applications.  The people and technology of Viewgraphics
serve as the basis for our DVB and open system media gateway capabilities.  Immediately following the acquisition,
Viewgraphics became a wholly owned subsidiary of Optibase, Inc., our U.S.
subsidiary, and operated under the name of Optibase U.S., Inc., until it was
merged into Optibase, Inc. in June 2001. 
In connection with the acquisition, we paid an aggregate consideration
of approximately $43.6 million, of which $11.813 million (net of issuance
expenses) was paid in 1.37 million newly issued ordinary shares.  Substantially all of the employees of
Viewgraphics accepted our employment offers. 
John Krooss, the principal shareholder and the Chief Executive Officer
of Viewgraphics, joined us as the Chief Technology Officer of Optibase, Inc.
and as a member of our board of directors. Mr. Krooss ceased to be the Chief
Technology Officer in September 2001, and resigned from his service as a
director of the Company in July 2002. 364,023 ordinary shares, which were held
in escrow as part of the acquisition agreement with Viewgraphics, were returned
to us by a former employee and by the shareholders of Viewgraphics, following a
settlement agreement that we signed with them in January 2002. As a result, the
aggregate consideration paid by Optibase for the acquisition of Viewgraphics
decreased to $43.3 million, including the value of 1.006 million ordinary
shares. During the second quarter of 2002, due to the loss of SeaChange as a
customer of our MediaPump products and due to the decrease of our market value
at that time, we recorded an impairment of intangibles related with the
acquisition. Related impairment of intangibles consists of an adjustment made
for the valuation of the technology purchased from Viewgraphics and totaled at
approximately $6.8 million. During the second quarter of 2002 and in accordance
with the requirements of SFAS 142 Goodwill and other Intangible Assets (SFAS
142), we completed our goodwill impairment analysis and recognized a
transitional goodwill impairment loss of $854,000 as of January 1, 2002, which
was recorded as the cumulative effect of a change in accounting principle in
our consolidated statement of operations.

Amortization
and impairment of other intangible assets during 2001 totaling at $23.4 million
related to existing technology, assembled workforce, customer base and goodwill
in connection with the merger and including impairment of intangibles totaled
$18.7 million. Subject to SFAS No. 141 Business Combinations (SFAS 141) and
SFAS 142 issued in June 2001, goodwill and intangible assets will no longer be
amortized, but will be subject to annual impairment tests. Other intangibles
will continue to be amortized over their useful lives. We started to apply the
new rule as of the beginning of fiscal year 2002.

Beginning
February 2001, Festin Management Corp., a British Virgin Island corporation
jointly owned by Tom Wyler and Arthur Mayer-Sommer started to acquire our
ordinary shares on the open market. 
Based on the Schedule 13D Festin filed with the SEC (last amended on
July 15, 2001), Festin currently holds 3,100,000 ordinary shares, representing
25.06% of our capital stock (out of which 9,599 shares currently do not have
any voting rights, see note 2 to the major shareholders table in Item 7.A
herein) based on 12,371,206 ordinary shares outstanding as of June 15, 2003. In
June 2001, our board of directors appointed Wyler and Mayer-Sommer to serve as
directors of the Company and in September 2001, the board of directors
appointed Wyler to serve as the chairman of our board of directors. In February
2002, Wyler also assumed the role of Chief Executive Officer in charge of our
operations until we select a new chief executive officer. In June 2003, Wyler
was appointed by our board of directors as the chief executive officer, subject
to the approval of this appointment by our shareholders, as required under
Israeli law. Mayer-Sommer resigned from his service as a director of the Company
in October 2002. In our 2002 annual general meeting of shareholders, our
shareholders approved the grant of 200,000 options to Wyler exercisable into
200,000 shares, subject to amendments, representing approximately 1.6% of our
outstanding share capital.

In July
2001, we signed an agreement with a privately held Israeli company called V.Box
Communication Ltd. We committed to invest through one of our subsidiaries an
initial amount of $250,000 and up to an additional $343,000 before any other open
financing round. We continued to invest in V.Box, with the other shareholders
pro rata to the holdings in V.Box. To date we have invested an aggregate of
$1.3 million in exchange for convertible notes issued by V.Box. Following V.
Boxs acquisition of BroadLogics Satellite Express(TM) and DTV Product Lines,
we signed an agreement with V.Box to sell and distribute the above-mentioned
products in the North America market. Additionally, we support V.Box
operational activities. Pursuant to this agreement V.Box utilizes our
manufacturing abilities and strong U.S. presence to enhance its revenues.

18

---

---

During
the third quarter of 2002 we decided to cease additional research and development efforts for the MediaPump, VideoPump
and the MGW 3100.  We also decided to
shut down the VideoPump and MGW 3100 product lines. The costs related
were approximately $505,000.

4.B Business
overview

The use of video images as a means of enhancing
and enriching electronic communications has become pervasive in todays
commercial and consumer markets.  Video
images have been historically produced, stored and distributed almost
exclusively in analog formats.  This
medium has a number of inherent technical limitations in the areas of image
resolution and color correctness. 
Digital video products have emerged to address these limitations.  During the production process, digital
content is easier to manipulate than analog, and the quality of digital content
is unaffected by time, usage or successive copying.  Digital video can be indexed and searched using powerful, readily
available database technology, and storage of digital video occupies a fraction
of the physical space required for analog tapes.  Finally, digital video can be transmitted over digital networks
and requires less bandwidth than analog video transmission, and is therefore
more accessible and less expensive.

The efficiency of digital video storage and
distribution depends upon the use of compression technology.  For example, it would require 370 CDs to
store approximately two hours of uncompressed, high-quality digital video,
whereas storage of the same data compressed would require only eleven CDs or one
DVD disk.  By digitizing and compressing
incoming analog video content, encoder formats audio and video streams, which
are then combined, or multiplexed, into a single synchronized data stream.  This stream can be further multiplexed with
other data streams achieving an even greater efficiency in network
transmission.  A decoder at the intended
destination separates, or de-multiplexes, the transmitted streams to provide
usable digital video content.  While a
variety of digital video compression formats have been developed, the MPEG
standard has emerged as the leading open standard and has been chosen for DVD
and digital television, or DTV. Internet streaming applications, however, tend
to use proprietary video compression formats of which, recently, Microsofts
Windows Media format seems to become dominant.

Video content comes from a variety of sources,
including live video feeds and previously recorded video that may have been
digitally authored.  The video must then
be encoded before it can be stored in a video server or transmitted live across
the network.  Content stored in a video
server is provided on demand, allowing a client to access, search and view
video non-linearly.  Video on demand is
well suited for applications such as video archiving and news editing.  Video transmitted live can be sent to a
group of addresses simultaneously, or multicast, enabling concurrent
distribution of video to pre-specified clients.  Multicasting is well suited for applications such as business
television, distance learning and residential multi-channel television.  In either case, the video must be formatted
to match the network protocol and bandwidth constraints before it can travel
from the video interface or the video server to the end-user over the network.  To replay the transmitted or stored digital
content, different types of playback devices may be used, all of which contain
a decoder to decompress the video stream and reconstitute it into a viewable
image.

The technologies required for the transmission
and reception of digital video over networks are currently available.  However, there are a number of problems that
create substantial inefficiency and complexity in the delivery of digital video
files.  First, there are several
competing software protocols for the transmission and reception of video
files.  In addition, different networks
operate at widely varying data transmission rates, and different viewing
appliances, such as PCs, PDAs, and cell phones, operate at widely varying
processing speeds.  To fill the needs of
all markets, a video service provider would have to offer separate files of the
same content, each encoded using different software protocols and be able to
transmit each of these files at different speeds, which would demand extremely
large amounts of data storage and system complexity.  Moreover, the user would have to be well versed in the technology
and have to manually request a digital video file in the proper software
protocol and transmission rate for his or her reception device.

19

---

---

Distribution of digital video content over
packet-based networks requires software application layers on top of the
encoders and decoders that can successfully manage the transmission of
packetized data and optimize image quality for a given bandwidth.  The task of integrating software, encoders
and decoders for this purpose becomes increasingly complex in packet-based
network environments where there are multiple standards and simultaneous users,
each multitasking across several applications. 
For example, ensuring a high-quality display of digital video content on
a home computer system where the user is operating a single application while
viewing the image can be accomplished relatively simply.  However, in a corporate network environment
such as a brokerage firm, where there may be hundreds of application-intensive
users, each trying to receive e-mail, real-time stock quotes and live digital
video news feeds simultaneously, the challenges of overcoming network errors
and delivering a high-quality, real-time video image over limited and changing
system bandwidth require increasingly sophisticated solutions.

We
provide high-quality, cost-effective networked systems that enable the
preparation and delivery of digital video over IP and other networks.  Based on our expertise in both networking
and video compression technologies, we have created a suite of products used in
applications such as delivery of video over broadband networks, digital video
archiving, distance learning, business television and content creation.  We have developed products that allow for real-time
compressed video uploading to video servers and live multicasting over
networks.  Our products meet the
challenges of achieving exceptional video quality within the constraints and
changing parameters of existing networks.

We
have developed products that provide for the capture, encoding and preparation
of video content and allow for the transmission of digital video streams across
the network.  Using our encoding
technology, video can be compressed and transmitted over IP and other networks.  Our video streaming technology bridges the
real-time nature of the encoder with the packet-based network protocol, which
is not well suited for real-time applications due to the non-linear
transmission of data packets.  Our
products enable network clients to decode this digital video stream and to view
it either as a live multicast transmission or on demand if the video content
was previously stored in the video server. 
Our network systems are comprised of a combination of our hardware
platforms and our software applications and tools, which allow system
integrators to easily incorporate new hardware platforms into their existing
applications and to rapidly develop new applications by building on their
existing knowledge of our software.

The
technologies and products that came with the Viewgraphics acquisition enable
the delivery of digital video where the DVB protocol is required.  Utilizing the DVB expertise, we now offer
products that bridge the gap between the Broadcast and the network worlds, by
offering the capability to translate in real time, DVB streams over the IP
protocol as well as to transmit IP streams over DVB networks.

The
recently released MGW 5100, a carrier grade video streaming system,
demonstrates the integration of ViewGraphics DVB technology with our encoding
and streaming technologies. This product also adds transcoding (decompressing
and recompressing an already compressed video source in a different compression
format and/or compression ratio) and pre-processing (compression enhancing)
technologies to our product portfolio along with other system level
capabilities such as redundancy (an ability to allocate extra product modules
for automatically backing-up other modules in case of failure for enhanced
reliability and service availability) and hot swap (the ability to change
system parts while the system is operating).

Our
breadth of products, including our networking systems, software applications,
hardware platforms, integration tools and content creation tools, allow us to
meet the video networking needs of a wide variety of customers and strategic
partners.  As the use of networked video
applications continues to expand, we intend to leverage our expertise in
digital video technologies and network protocols to continue to develop and
provide products that make these applications more accessible and easy to use.

| | Business
  Strategy
| | -------------------

Our
business is built on three strategic efforts: Building Blocks, Enterprise
Streaming and Broadband television. Our goal is to be a leading market player
with each of the strategic efforts.

Building
Blocks.  We sell encoding and decoding PCI platforms
along with our enabling software to OEMs, system integrators and professional
users. The market for these products is becoming increasingly more demanding.
As technologies for video compression become more pervasive the market is
requiring increasingly higher performance and quality. Also, as available
bandwidth increases and digital video becomes more accessible and
interoperable, more applications are being introduced requiring sophisticated
digital video components. This trend represents an opportunity for us to
increase our market share.  We believe
that our brand name, experience and expertise put us in a position to leverage
these trends to expand our market share by providing new competitive products
as solutions for a wider range of applications. To this end we continuously
look for new features to enable new applications and at the same time continue
to enhance and improve the quality of our offerings. As a result, despite the
static nature of the market, we strive to increase our market share and
revenues from this effort from the Building Blocks products.

20

---

---

Enterprise
Streaming.  We sell encoding and streaming systems to
system integrators. The enterprise streaming market is expected to grow
significantly over the next few years. Our systems have differentiating
features in this market. We intend to become a leading provider of targeted
market segments that can be addressed with current and next generations of our
product. We are working to make our systems interoperable with key vendors
equipment and compatible with de facto standard formats.

Broadband
Television.  We sell MGW 5100, an encoding, transcoding
and streaming carrier-grade system to telephone operators, who use DSL and
fiber technologies to increase infrastructure capacity and add multi channel
television to their services. The television over DSL market is expected to
grow significantly over the next few years. We believe our system is one of the
most advanced in the market. We intend to leverage our technological leadership
in this market to gain a leading position and market share. We are partnering
with key vendors and system integrators to make service deployments easier.

| | Products
| | --------

Most
of our products embody both a hardware platform and proprietary software.  The hardware platform determines certain
basic features, such as the resolution of the encoded stream, the types of
video and audio inputs and the availability of certain preprocessing functions.
Some of the products are networking devices, which also determine the
networking input and output interfaces.

| | PRODUCTS                     |  | DESCRIPTION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  | APPLICATIONS                                                                                                                                
| | ---------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------
| |                              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | 
| | Media Streaming
  Products  
| |                             
| | MGW 5100Last release Q4/2002 |  | A
  multi-service platform that lets carriers stream TV over broadband IP or ATM
  networks such as xDSL, LMDS and FTTx. MGW 5100 encodes, transcodes, transmits
  and recasts up to 24 MPEG-1, MPEG-2 or MPEG-4 ISMA/WMT (future release) video
  channels at a time. An SNMP Element Management System (EMS) offers
  provisioning, monitoring, alarming and control and enabling smooth
  integration into a variety of networks and access management applications.                                                                                                                 |  | TV broadcast
  over IP/ATMbroadband networks
  Video server upload forVOD services                                                          
| |                              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                                                                             
| | MGW 2400Last release Q4/2002 |  | A multi-
  channel WMT encoding and streaming server designed to enable the deployment
  of advanced streaming media services over the broadband Internet and
  corporate networks. MGW 2400 encodes and streams up to six live Microsoft WMT
  compliant streams over broadband terrestrial and wireless networks such as
  ADSL, FTTx, satellite, cable, Ethernet LANs and the Internet. It supports
  live WMT stream upload to Microsoft Windows Media Server and IP multicast,
  unicast, UDP and HTTP protocols, ensuring efficient transmission over a wide
  range of networks. |  | TV Broadcast
  over IP toHome PCs
  Webcasting
  Video server upload for Webstreaming
  Business TV
  Corporate training
  Distance learning
| |                              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |                                                                                                                                             

21

---

---

| | PRODUCTS                                                                                 |  | DESCRIPTION                                                                                                                                                                                                                                                                                                   |  | APPLICATIONS                                                                                                      
| | ---------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------
| |                                                                                          |  |                                                                                                                                                                                                                                                                                                               | 
| | MGW 2000Last release: Q2/2003                                                            |  | Rack mountable, modular video streaming server supports up to 6 MPEG
  1 & 2 encoding modules in single enclosure.  Reliable, using embedded OS and no moving parts.  Supports IP multicast and comes with web
  based management system.                                                                     |  | Video over
  IP for Enterprisenetworks                                                                            
| |                                                                                         
| | Networking Software                                                                     
| |                                                                                         
| | ComMotion ProLast release: Q4/2001                                                       |  | Scalable, multi-channel, software application for the transmission of
  live and pre-recorded MPEG-1 and MPEG-2 digital video and MP3 digital audio
  over public and private broadband networks. 
  Supports IP multicast and video server uploading, and is available
  with a web based management system. |  |      Video
  Streaming
       Networking
       Business TV
       Distance learning
       Remote monitoring
| |                                                                                          |  |                                                                                                                                                                                                                                                                                                               |  |                                                                                                                   
| | ComMotion UDPLast release: Q4/2002                                                       |  | Predecessor to ComMotion Pro, still supported in most encoder
  families.                                                                                                                                                                                                                                     |  |      Video
  Streaming
       Networking
       Business TV
       Distance learning
       Remote monitoring
| |                                                                                         
| | Content Creation
  (typically used with our Integrator Tools and Platforms, shown below)
| |                                                                                         
| | ComposerLast release: Q2/2003                                                            |  | Encoding management software application                                                                                                                                                                                                                                                                      |  |      Video
  archiving
       Content creation
       Networking                                               
| |                                                                                         
| | Integrator Tools
  and Platforms                                                        
| |                                                                                         
| | MovieMaker 200SLast Release: Q2/2003                                                     |  | Half size, single board MPEG 1,2 encoder family                                                                                                                                                                                                                                                               |  |      Video
  networking
       Content Creation                                                                 
| |                                                                                          |  |                                                                                                                                                                                                                                                                                                               |  |                                                                                                                   
| | MovieMaker 200Released: Q4/1999                                                          |  | Single board MPEG-1 and MPEG-2 encoder family                                                                                                                                                                                                                                                                 |  |      Video
  Networking
       Content creation                                                                 
| |                                                                                          |  |                                                                                                                                                                                                                                                                                                               |  |                                                                                                                   
| | MovieMaker 100SRelease Q2/2001                                                           |  | size PCI
  MPEG-1 encoder                                                                                                                                                                                                                                                                                     |  |      Surveillance
        asset management,
      distance learning
  content    creation                       
| |                                                                                          |  |                                                                                                                                                                                                                                                                                                               |  |                                                                                                                   
| | MovieMaker     Plus/ExpressReleased: 
       Q4/1998                                     |  | MPEG-1 encoder                                                                                                                                                                                                                                                                                                |  |      Networking
       Video archiving
       Corporate applications                                           
| |                                                                                          |  |                                                                                                                                                                                                                                                                                                               |  |                                                                                                                   
| | VideoPlex XpressLast
  release: Q2/2001                                                  |  | MPEG-2 decoder, composite and video in a window output                                                                                                                                                                                                                                                        |  |      Network
  client station                                                                                    
| |                                                                                          |  |                                                                                                                                                                                                                                                                                                               |  |                                                                                                                   
| | VideoPlex Pro
       Released: Q2/1998                                                   |  | MPEG-2 decoder, composite output, close caption and genlock features                                                                                                                                                                                                                                          |  |      Ad
  insertion                                                                                              
| |                                                                                          |  |                                                                                                                                                                                                                                                                                                               |  |                                                                                                                   
| | VideoPlex PlusReleased:
  Q1/1996                                                        |  | MPEG-2 decoder, composite output                                                                                                                                                                                                                                                                              |  |      Business
  TV                                                                                               
| |                                                                                          |  |                                                                                                                                                                                                                                                                                                               |  |                                                                                                                   
| | MPEG 8000Released:
  Q1/1998                                                             |  | Custom product for Harmonic                                                                                                                                                                                                                                                                                   |  |      CATV                                                                                                        

22

---

---

| | PRODUCTS                               |  | DESCRIPTION                                                                                                          |  | APPLICATIONS                      
| | -------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------
| |                                        |  |                                                                                                                      | 
| | MPEG 8500Released:
  Q4/1999           |  | Custom decoder board for Gilat Communications                                                                        |  |      Satellite                   
| |                                       
| | DVB System and Interface Products     
| |                                       
| | MGW 3100Last
  Release: Q1/2002        |  | MPEG-2 DVB
  to MPEG over IP gateway system                                                                          |  | Delivery of
  DVB streamsover IP  
| |                                        |  |                                                                                                                      |  |                                   
| | MediaPumpLast
  Release: Q1/2003       |  | Family of
  products for streaming MPEG-2 video in DVB formats                                                       |  | Broadcasting                      
| | Uncompressed Digital Video Interface  
| |                                       
| | VideoPumpLast
  Release: Q2/2002       |  | Family of
  PCI interface boards for streaming full rate, uncompressed digital video in
  and out of computer memory |  | Content
  creation applications   
| |                                       
| | Software Development Products         
| |                                       
| | RTE SDKLast
  Release: Q3/2002         |  | Software
  development kit for application development over Optibase encoder families                                |  | Multiple
  applicationcapabilities
| |                                        |  |                                                                                                                      |  |                                   
| | RTD SDKLast
  Release: Q1/2002         |  | Software
  development kit for application development over Optibase decoder families                                |  | Multiple
  applicationcapabilities
| |                                        |  |                                                                                                                      |  |                                   
| | MediaPump
  SDKLast
  release: Q1/2003 |  | Software
  development kit for application development over MediaPump family                                         |  | Multiple
  applicationcapabilities
| |                                        |  |                                                                                                                      |  |                                   
| | VideoPump
  SDKLast
  Release: Q2/2002 |  | Software
  development kit for application development over VideoPump family                                         |  | Multiple
  applicationcapabilities

Our breadth
of products offers high quality and cost-effective solutions.  We use large-scale integrated circuits to
manufacture our products on a single printed circuit board.  Designed for use with all current Microsoft
operating systems, these single-board solutions are both compact and cost-effective
for our customers.

Products
Under Development.We are currently developing new features for MGW
2000, MGW 2400, MGW 5100 and MovieMaker 200S. We are also developing a new
generation of the MovieMaker200S product line with many new capabilities, and a
new MPEG-4 product MovieMaker400.

| | Markets and Customers
| | ---------------------

Our
products are marketed to a wide range of customers.  They include companies with which we have developed strategic
relationships, many of which purchase our products directly, while others help
generate reference sales; system integrators, large and small, which integrate
our products into larger systems; distributors which sell in a specific
territory and manage a large network of resellers; and resellers which sell
directly to end users.  Our products are
aimed at four major markets: 1) broadband television telephone operators; 2)
the broadcast market, such as advertising insertion and digital cable TV
transmission; 3) professional video content creation markets; and 4) the
enterprise and corporate markets which include applications such as distance
learning and business TV.  These markets
vary greatly in the required video quality, acceptable price tags and other
feature requirements.  Our breadth of
products and wide range of feature sets, allow us to answer the needs of these
widely different markets.

23

---

---

Listed
below are representative applications, integrators and end-users using our
products:

| | Markets                      |  | Applications                                   |  | Integrators/End-Users                                                                                                                                                       
| | ---------------------------- |  | ---------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                              |  |                                                |  |                                                                                                                                                                             
| | Broadband                    |  | Multi channel TV over DSL and FTH              |  |      Chunghwa
  Telecom
       Fastweb
       HTC                                                                                                                        
| | Broadcasting                 |  | Video on Demand (VOD),
  Near VOD, Hospitality |  |      SeaChange
  International
       Prediwave                                                                                                                           
| |                              |  | Ad Insertion                                   |  |      SeaChange
  International
       IBM Corporation
       AdTech, Inc.
       Maddox Broadcasting                                                                    
| |                              |  | Cable TV transmission                          |  |      Harmonic
  Inc.                                                                                                                                                       
| |                              |  | MPEG-2 transport stream splicing               |  |      Seachange
  International                                                                                                                                             
| |                              |  | Interactive TV                                 |  |      Open
  TV
       Worldgate
       Liberate                                                                                                                          
| | Enterprise                   |  | Business TV                                    |  |      German
  Foreign Ministry
       Cisco
       Michigan House of Representatives                                                                                     
| |                              |  | Distance Learning                              |  |      Gilat
  Satellite Networks                                                                                                                                            
| |                              |  | eLearning                                      |  |      Safari
       Rockford college
       Nanyang Technological University                                                                                              
| |                              |  | Point-of-Sale, Point of Information            |  |      Italian
  Postal Service
       Gilat Satellite Networks/Spacenet Inc.
       ITEC Corporation
       The J. Paul Getty Museum
       Virgin Records America, Inc.
| |                              |  | Monitoring and Satellite 
  News Gathering     |  |      Antena
  3
       National Telecommunications, Ltd. (UK)
       Livewire                                                                                            
| |                              |  | Telemedicine                                   |  |      Stanford
  University
       Network Concepts/NCI
       Biologic                                                                                                   
| | Professional ContentCreation |  | Video Archiving/Cataloging                     |  |      CNN
       British Broadcasting Corporation
       French National Library                                                                                          

24

---

---

| | Markets |  | Applications         |  | Integrators/End-Users                                                               
| | ------- |  | -------------------- |  | ------------------------------------------------------------------------------------
| |         |  |                      |  |                                                                                     
| |         |  | DVD and VCD creation |  |      Nimbus
  CD International
       Various players in APAC
       Fish & Neave

The
following application examples illustrate the use of our products:

Antena
3.  Foregoing costly dedicated satellite links,
Antena 3, a major broadcaster in Spain, is using our encoding and transmission
platforms to transmit news between production centers over Native ATM and IP
networks. The news stories are transmitted live or uploaded via FTP. The offices
handle two types of footage: footage that is edited and stored for later
transmission and footage that is transmitted live to the News Operation Center.
In the first case, the video footage is encoded by the MPEG MovieMaker 200S and
uploaded to the NOC by FTP. In the second case, a live video stream is fed into
the MPEG MovieMaker 200S, encoded into broadcast quality MPEG-2 digital video,
and then, using our MPEG ComMotion UDP streaming software, streamed live over
an IP network to a receiving computer at the News Operation Center.

The
video contribution network offers Antena 3 tangible advantages: using an ATM
network is far more cost effective than a dedicated satellite uplink. An ATM
network affords greater flexibility since it is available at all times. our
products offer broadcast quality video.

Safari.  The
Rockford Public School district in Grand Rapids, Michigan wanted a reliable,
flexible and easy-to-use VOD system with a rapid response time that would
benefit educators and their students. 
Each of the 12 Rockford Public Schools houses its own VCRs, DVDs and
utilizes SAFARI Source Controllers to allow remote LAN-based control of the
analog video sources. For the real-time MPEG streaming of analog sources,
SAFARI uses our MGW 2000, a TV streaming platform that enables the delivery of
TV over IP services to the classrooms. With SAFARIs customized architecture,
each school is able to access, control and view analog video media located in
any of the other schools.  By making it
straight-forward to access programs and video content located in other schools,
the VOD system eliminates the need for duplicate content to be stored in VHS or
DVD format in each individual school. It is a cost efficient solution that
offers students and staff a much wider selection of programming.

Cisco.  In
order to provide the best financial service to its customers, a large
international banking institution wanted to keep its stock traders constantly
updated on market changes with live news feeds and stock analysis data.  To meet this challenge, Cisco Systems and
Optibase teamed together to provide a private video distribution network to the
stock traders.

The
network is powered by Cisco IP/TV 3400 broadcast server using our MPEG MovieMaker 200 encoder.  The MovieMaker
captures live video feeds and encodes and compresses the data, which is then
streamed to the desktops of 750 stock traders. 
Each stock trader has four monitors on their desktop powered by an HP
Kayak computer containing our VideoPlex
XpressMPEG decoder.  Stock
traders can view live transmissions of news services such as Bloomberg news or
Financial Times TV in a small window on any of the monitors along with
real-time financial data.  Besides its
importance as a real-time information tool, the network will also be used for
live video briefings and updates from the banks senior account managers.

Chunghwa
Telecom (Taiwan`s largest broadband network operator).In order to deliver multimedia on-demand services
such as video-on-demand and karaoke-on-demand to more than 20,000 of its ADSL
subscribers,  Chunghwa Telecom selected
our MGW 2000 streaming server. This product is a multi-channel streaming server
with an embedded operating system, capable of encoding and transmitting 16 live
and pre-recorded streams simultaneously, and delivering full-screen,
full-motion, high quality video. Its scalability and flexibility, and
field-swappable encoding modules, proved to be winning factors in the stringent
trials conducted by Chunghwa Telecom.

Michigan
House of Representatives. In order to stream live content of House proceedings to the desktops of
720 representatives and support staff, the Michigan House of Representatives
selected the MGW 2000 streaming server.
This Business TV application is comprised of MGW 2000 units, which stream six
channels of live MPEG-1 content in real-time over an IP infrastructure. Content
includes live coverage of proceedings taking place in House Chambers and
committee rooms as well as a live feed from CNN. The system also accommodates
the Houses data transmission needs. Representatives and staff can now stay
abreast of floor debates as well breaking news around the country, without
leaving their desktops.

25

---

---

Concurrent.  Concurrent
Computer Corporation, or Concurrent, provides a digital video system to a large
U.S. aerospace corporation for use in its United Kingdoms WAH-64 Apache
Longbow Helicopter Training Program. 
The digital video system consists of Concurrents MediaHawk VOD
technology, and our MPEG MovieMaker 200encoder,
MPEG ComMotion and video
streaming software.

The
debrief systems can simultaneously record the actions of one crew in a
helicopter flight simulator while playing back the events of a previous session
for a second crew.  The systems can
accommodate multiple video channels or streams, each of which is completely
independent and interactive.  Users are
able to select, play, stop and pause on each digital video stream independently
with prompt and predictable response times.

Our
proprietary software tools played a crucial role in the seamless integration of
the MovieMaker encoder with the
MediaHawk video server.

| | Sales and Marketing
| | -------------------

We sell our
products through the combined efforts of our direct sales force and through
indirect channels, including independent distributors, system integrators and
resellers.  A key element of our sales
and distribution strategy is to cultivate strategic relationships with
companies that can promote reference sales with the potential for significant
revenue impact.  The particular mix of
sales and distribution methods we use varies according to geography.

Our
sales efforts in North America, Central America and South America are managed
by Optibase, Inc., which is headquartered in Mountain View, California.  Our North American sales activities are
conducted primarily through our direct sales organization, which focuses on key
accounts, which include system integrators and OEM accounts, that offer
strategic opportunities or large volume potential.  North American sales efforts are supplemented by our VAR (Value
Added Reseller) channel, which sells our products directly to end-users.  North America accounted for approximately
48% of out total sales in 2000, approximately 52% of out total sales in 2001
and approximately 61% of out total sales in 2002.

Outside
of North America, the majority of sales are handled via a network of
distributors and resellers that manage small and large accounts alike.  As a rule, this channel is responsible for
stocking an inventory of our products to meet immediate local demand, providing
first-line sales and technical support for their customers, and conducting
local marketing efforts, including trade shows, seminars, advertisements and
mailings, with the use of co-op funds from us.

Distributors
also generate and follow up on sales leads, act as the sole interface with
customers, translate our promotional and technical collateral and endeavor to
meet agreed sales targets.  Depending on
market size and potential, the number of distributors and other partners in a
given geographic region varies.  Each is
carefully selected based on its background in video and networking technology,
its knowledge of the local market, its customer base and its reputation.  In addition, we strive to work with partners
who will devote significant time and effort promoting our products and who do
not have product line conflicts.  None
of our distributors has exclusive rights with respect to any of our products or
market segments, and none of our distribution agreements limits our ability to
independently develop products or to enter markets, except for certain
geographical restrictions that are generally terminable on three to six months
notice.  While most of our relationships
can be terminated by either party upon short notice and without significant
penalty, we have maintained long-standing relationships with a vast majority of
our distributors.  Many of our largest
distributors have carried our products for over three years.

Distributor
and direct account relationships outside of North America are managed from our
headquarters in Israel.  In Europe these
relationships are supported by three Optibase sales managers, based in France,
Israel and Austria.  This local
presence approach brings with it many advantages related to culture and
language.  The European Sales Managers
report to headquarters in Israel.  Our
sales efforts in China and Hong Kong are directed by our office in Bejing,
China and those in Japan are aided by our Japanese office in Tokyo.  Other regions in APAC are managed directly
from our headquarters in Israel. 
European sales constituted approximately 15% of our total revenues in
2000, approximately 15% of our total revenues in 2001, and approximately 12% of
our total revenues in 2002, while sales in the Far East, including Japan,
constituted approximately 21% of our total revenues in 2000, approximately 25%
of our total revenues in 2001, and approximately 23% of our total revenues in
2002.  Sales in Israel and other areas
outside of North America was approximately 16% of our total revenues in 2000,
approximately 8% of our total revenues in 2001 and approximately 4% of our
total revenues in 2002.

26

---

---

Combined
sales to the three leading distributors of our products accounted for
approximately 13% of our worldwide sales in 2000, approximately 13% of our
worldwide sales in 2001, and approximately 14% of our worldwide sales in
2002.  Combined sales to our three leading system integrators
accounted for approximately 30% of our sales in 2000, approximately 23% of our
sales in 2001, and approximately 30% of our sales in 2002.

We
also received grants from the Marketing Fund for specific overseas marketing
expenses.  The grants were based upon
the expenses reported by us to the Marketing Fund.  All marketing grants recorded from the Marketing Fund until 1997
are linked to the dollar and are repayable as royalties at the rate of 3% of
the amount of increases in export sales realized by us, up to a total amount
equal to the grants we received from the Marketing Fund.  Grants recorded from programs beginning on
or after January 1, 1998 bear royalties of 4% plus interest at LIBOR.  We will face royalty obligations on grants
from the Marketing Fund only to the extent we actually achieve increases in
export sales.  The proceeds of these
grants were presented in the Consolidated Financial Statements as a reduction
of selling and marketing expenses. 
Through December 31, 2002, we had recorded grants from the Marketing
Fund in the aggregate amount of $2.8 million, and had a contingent liability in
the amount of $72,000 for which we had not yet recognized royalty obligations.
No funds were received from the Marketing Fund during the years 2000, 2001 and
2002.

| | Technology
| | ----------

Since our
inception, we have focused the efforts of our team of experienced personnel on
developing expertise in MPEG-based digital video.  MPEG-1 was finalized as a standard in 1991, and by 1992 we had
introduced our first MPEG-1 PC decoder, which allowed for high-quality viewing
of digital video content on stand-alone PCs, and our first MPEG-1 PC
encoder.  In 1993, we became one of the
first companies to offer a real-time MPEG-1 encoder.  In 1995, we expanded our expertise to include IP and other
packet-based networks.  In 1996, we
combined our networking expertise and extensive MPEG experience to introduce
our first MPEG networking products, and in the third quarter of 1998, we began
shipping our MPEG-based content creation tool, DVDFab!.  In the first quarter of 2000, we released ComMotion Pro, which is a scalable,
Web-based networking software application enabling the transmission of MPEG-1
and MPEG-2 digital video and MP3 digital audio over private broadband
networks.  Our in-depth understanding of
network protocols and the MPEG standard has allowed us to develop real-time
MPEG data transfer products and content creation tools.  Each of our products is defined by a hardware
platform used in conjunction with a core proprietary software technology.

In
November 2000, we released our MGW 2000, which is the first product of our new
MGW product line that provides streaming media gateway solutions for
enterprises and broadband markets.  In
November 2002 we released the MGW 2400, which enables direct streaming of video
into the Internet, Intranets and other broadband IP networks in MPEG-4 and WMT
formats. In December 2002, we released the MGW 5100, a carrier class product
that enables encoding, transcoding and streaming of video over broadband IP
networks.

In December
2000, we acquired Viewgraphics Inc. 
Viewgraphics adds critical expertise in DVB (Digital Video Broadcast)
technology, which primarily involves the transmission of MPEG-2 over digital
cable networks.  Viewgraphics also has
contributed expertise in uncompressed serial digital video technology and open
systems based software technology. 
Viewgraphics was founded in 1985. 
Between 1985 and 1991 Viewgraphics designed and developed imagery frame
buffer technology under contract to US defense contractors.  Between 1991 and 2000 Viewgraphics sold a
product called Viewstore, a high-end video sequencer, to the video research
marketplace.  Over this period Viewgraphics
became a leader in advanced video technologies and interface
methodologies.  In 1996, Viewgraphics
brought out the MediaPump and VideoPump products for DVB and SDI (Serial
Digital Interface) respectively. 
Viewgraphics had become the leader in DVB interface technology primarily
through superior technology in the areas of stream processing, stream splicing
and overall signal integrity and operational reliability.  In 2000, Viewgraphics introduced DTV:Net and
DTV:Com software products.  These products
are respectively a DVB to IP streaming gateway and a DVB data injector.  The core MPEG-2 streaming and stream
processing technology embodied in these products adds DVB expertise to our
MPEG-2 and streaming expertise. During
2001, the MediaPump was redesigned and enhanced. We introduced an entirely new
and improved product family, the MediaPump 533. We also introduced the MGW 3100
DVB/IP Gateway system, based on the MediaPump products. The MGW3100 is a bridge
between DVB and IP networks for video over IP backhaul and distribution of DVB
content over IP.  In addition, we
successfully incorporated the DVB demultiplexing technology of the MediaPump
into the MGW5100 to enable the transcoding of video content from satellite and
cable feeds and its distribution over IP and ATM-based access networks. In the
third quarter of 2002 due to the loss of SeaChange as a customer of our
MediaPump products and after assessing markets conditions, we decided to cease
additional research and development efforts for the MediaPump, VideoPump and
the MGW 3100.  We also decided to shut
down the VideoPump and MGW 3100 product lines, while continuing to support and
sell the MediaPump.

27

---

---

Encoder
and decoder related technology.  Firmware, the low-level
software that resides on the board, provides for the basic audio/video
compression operations.  We have
implemented our own MPEG-audio compression algorithm on a dedicated digital
signal processor or DSP and we have integrated an implementation of a Dolby AC3
audio encoder on the same DSP. We have developed a high quality MPEG-4 Advanced
Simple Profile encoder on a powerful multimedia DSP from Equator Technologies
for some of our products. We are also researching and implementing algorithms
to be implemented by firmware and DSP to improve the quality of our encoders
using advanced preprocessing techniques. Real-time audio and video layers
handle the real-time processing of the elementary audio and video streams that
are generated through the encoder hardware. 
At the audio/video synchronization layer, our patent pending EverSync technology enables
synchronization of both audio and video, even with unstable video sources or
random noise and disconnections, eliminating the need for an external
correction device.  Another related
technology that we have developed is a two-pass variable bit rate encoding
process that allows for better optimization of the bit per frame ratio to
achieve even quality throughout the entire range of content.

Another
layer is used to handle the combination, or multiplexing, of the elementary
audio and video streams into a single stream. 
This layer allows for multiplexing of programs originated from multiple
encoders into a single transport stream and can handle multiplexing of variable
bit rate MPEG streams as well as constant bit-rate streams.  In addition, despite the fact that MPEG
standards do not allow for certain lower frame rates, our SmartMux patent pending technology
embodied in this layer enables generation of variable frame rate streams that
can achieve higher quality streams at a given bit-rate.  Another component handles the frame accurate
operation of the encoding process and time code manipulation to enable frame
accuracy within specific parameters of a content creation product.  A real-time preview component allows for
previewing encoded material via an external MPEG decoder.

Because our
proprietary software is compatible across most of our hardware platforms, a
separate component is able to automatically detect the hardware installed,
determine its capabilities and report them to the user application without the
user needing to know which hardware platform is installed.  Other components combine with decoder
hardware to allow smooth back-to-back playback of clips without black frames or
artifacts during transitions and provide our Genlock feature which allows
locking of decoder hardware to external signals.

DVB
(Digital Video Broadcast) Technology.  We provide proprietary technology to record, play and process DVB multiple
program transport streams (MPTS).  Our
MediaPump PCI card can capture all the programs in a multiple program transport
stream (MPTS) stream.  Also, on output the
MediaPump takes several single program transport streams (SPTS), and combines
it together into one multiple program transport stream (MPTS).  This combining is done by the MediaPumps
multiplexer.  The MediaPump then plays
this stream out.  Before creating the
output multiple program transport streams, the MediaPump can also splicetogether the digital data bits for
two single program transport streams (SPTS). 
This patent pending technology represents an important technological
advantage since it makes it possible to switch between MPEG-2 streams without
either losing the picture entirely for a second or generating an ugly break-up
of the television picture. We have recently developed a DVB-compliant
scrambling capability implemented on the MediaPump hardware.

28

---

---

IP
Network-related technology.  We have developed standard transport
and control protocols such as RTP, RTCP and RTSP that are becoming widely
adopted for the streaming of multimedia over IP networks. In particular, we
have implemented the specifications of the ISMA (Internet Streaming Media
Alliance) for the transmission of audiovisual content over the Internet. We have also developed proprietary mechanisms
that allow system integrators to develop packet-based network solutions.  These mechanisms bridge the real-time nature
of MPEG encoders and the non-real-time nature of packet-based networks, and
allow for unicast, broadcast and multicast capabilities.  One of these mechanisms, clock-locking, is
used to lock the encoder to the network clock and enable unlimited continuous
playback of synchronized audio and video. 
Another mechanism enables our decoders to recovery gracefully when
encountering network errors that characterize video streaming in a lossy
environment.  We support de-multiplexing
on the host processor and also on our decoder hardware. The latter allows the
PCl to perform other time critical tasks and enables multi-board operation in a
single PC.  The MGW 3100 DVB to IP product is based on
sophisticated streaming and routing software, and includes patent pending
techniques for clock locking, drift compensation and data multiplexing for
packet networks.  The MGW 3100 also has
advanced multicast and QoS (Quality of Service) technologies. In the third quarter of 2002 after assessing
markets conditions, we decided to shut down the MGW 3100 product line.

SDK
(software development kit) technology.  All of
the encoder and decoder related technology as well as the networking related
technology described above is contained within our software development kits,
or SDKs.  These various components and
tools are organized within the SDKs, which are structured to manage the
inter-dependency of these various components in an optimal manner.  The SDKs are designed to allow system
integrators to easily incorporate our MPEG encoders, DVB interfaces, and SDI
video interface hardware platforms into their own digital video systems and
establish links with existing end-user applications, exploiting the full range
of our core technologies for their applications in a productive manner.  The SDK has been designed so that once it
has been used to incorporate one of our products into a customers system, the
same system can easily be upgraded to incorporate new generations of our
products or expanded to incorporate new products and capabilities.

Content
creation technology.  Specific technology contained in the encoder
SDKs, which facilitates content creation, is embodied in our content creation
software.  The software incorporates
much of the proprietary technology described above, including EverSync, variable bit-rate encoding,
advanced multiplexing, SmartMux
and smooth playback, to facilitate the content creation process.  We also sell an uncompressed video capture
software product called Clipper.This package makes it possible
for users of VideoPump SDI video interface cards to import and export video
clips to their host computers. This product is unique in that it provides
perfectly frame accurate capture and playout of the video. In the third quarter of 2002 after assessing
markets conditions, we decided to shut down the VideoPump product line.

Broadband
Internet related technology.  We are developing the video and
audio compression algorithms targeted to meet the broadband Internet bandwidth
and quality requirements.  We define the
broadband Internet to include the bandwidth range of 10kbps to 3.5 Mbps, which
can be served by cable modems, xDSL modems and wireless technology.  The video encoding technology that we are
developing is based on the MPEG-4 video international standard, and has been
implemented on a powerful multimedia DSP. 
The technology includes advanced pre-processing algorithms, advanced
motion estimation algorithms and improved rate control algorithms.  We are also integrating an AAC (Advanced
Audio Coding) encoder into our MPEG-4 products..

Management
technology. As
part of the development of our media gateways products we have developed
management software. We have implemented HTML software for management with
web-based browsers and SNMP agents for some systems which can be integrated
with generic network management systems like HPOpenView.

Transcoding
technology. An
important feature developed for the MGW5100 is the ability to transcode one
media format to another. We have developed the ability to transcode compression
formats from MPEG-2 to MPEG-4, from MPEG-2 to Windows Media compliant
compression and to transrate from MPEG-2 at a high bitrate to MPEG-2 at a lower
bitrate. The source can be either VBR or CBR. We have also developed the
ability to pass-through specified elements of the audiovisual information
without transcoding, such as closed captions and audio streams. In addition to
transcoding at the compression layer, we have further enhanced our networking
capabilities to perform translation of the network layer between DVB,
IP/Ethernet and ATM according to the needs of the service provider. With regard
to ATM we have developed the capability of transmitting audiovisual content
over native ATM and over IP over ATM.

Carrier
Class systems related technology.  As part
of the development of the MGW5100, we have implemented such features as
redundancy and scalability, no single point of failure, and the ability to meet
NEBS requirements. These features are required by Telcos and service providers
in order to ensure a reliable service to their customers.

29

---

---

Video
preprocessing and quality enhancement technology.  New
applications for MPEG-2 like video / DSL and video on demand for the cable
market have encouraged us to enhance the quality of our MPEG-2 video encoding
at low bitrates. We are developing tools for quality measurement, preprocessing
modules in DSP and FPGA and are researching more advanced techniques like
look-ahead and adaptive preprocessing. The first implementations of this
technology have already yielded good results for the encoders in the MGW5100.

| | Research and Development
| | ------------------------

We believe that our innovative and versatile
technology is at the core of our strength, and that our ability to enhance our
current products, to develop and to introduce new products, to maintain technological
competitiveness and to meet customer requirements is essential to our future
success.  Accordingly, we devote and
intend to continue to devote significant human and financial resources to
research and development.  For example,
we are currently focused on incorporating additional network capabilities,
developing formats such as Microsoft WMT and MPEG-4, into our digital video
network products.  We are also
researching algorithms to improve the quality of our encoders using advanced
preprocessing and are adding new functionality into our SDKs.  As part of the process of product
development, we work closely with current and potential customers, dealers,
distributors and leading companies in relevant industries to identify market
needs and define appropriate product specifications. As of May, 2003, our
research and development department comprised of 60 employees the majority of
whom are located in our headquarters in Israel and the rest in our Mountain
View (CA) facility. Our research and development net expenses were $6.2 million
in 2000, $15.6 million in 2001 and $8.1 million in 2002.  Research and development grants we received
were $1.4 million in 2000, $1.8 million in 2001, and $2.2 million in 2002.

Our research and development efforts have been
financed through internal resources as well as through programs sponsored by
the Office of the Chief Scientist, or OCS, of the Israeli Ministry of Industry
and Trade and the European Union. 
Generally, grants from the OCS constitute up to 50% of qualifying
research and development expenditures for particular approved projects.  Under the terms of the OCS participation, a
royalty of 3% to 5% is due on revenues from sales of products and related
services that are developed from projects funded by OCS.  Royalty obligations are capped at 100% of
the dollar-linked amount of the OCS grant. 
Royalties on grants recorded for programs beginning on or after
January 1, 1999 bear interest linked to the LIBOR.  The manufacture of products developed with
OCS grants must be performed in Israel, unless otherwise approved by the
OCS.  Such approvals will generally be
conditioned upon accelerating the rate of royalties and increasing the total
amount to be paid to as high as 300% of the grant.  Israeli government consent is also required for the transfer to
third parties of technologies developed under projects in which the government
participates.  Such consent is not
required for export from Israel of products developed with such
technologies.  Through December 31,
2002, we received grants from the OCS aggregating $3.9 million for certain of
our research and development projects. 
As of December 31, 2002, accrued and paid royalties to the OCS
totaled $2.8 million.  In addition to
the general OCS grants, we have received royalty-free grants through our
participation in a research program supported by the MOST Consortium and the
STRIMM Consortium, a part of the OCS Magnet royalty-free program.  One of the goals of the MOST project was the
creation and distribution of digital video over networks for on-line
services.  The MOST consortium project
was terminated on March 31, 2000. 
The goals of the STRIMM project are to provide seamless usage of
internet-base video and audio mail messaging services.  Various clients (using a PC, PDA, cellular
phone or similar terminals) on various access networks (broadband and
narrowband) would be able to receive and play video messages in stream mode
without the need to download the (large) video message to their device.  Video format and network protocols will be
transcoded without user intervention, according to the connection and device
capabilities of the terminal.  The
STRIMM project started on July 2000 and during May 2003 plans were submitted.
We have applied for OCS approval for an additional two years, until July 2005.

Through December 31, 2002, we recorded
grants from the MAGNET, MOST and STRIMM consortiums aggregating $3.4 million.

We are also involved in joint development
projects with large European companies, such as Philips research, Deutsche
Telecom, TDF, Aerospatiale Matra, Beta Research and THALES, conducted under the
auspices of, and with financial assistance from, the European Union Research
and Development Program.  Among the
goals of these projects are providing solutions aimed at bridging between video
streaming standards for the broadband and narrowband Internet and the
development of tools and applications for the creation and secure distribution
of digital video content.  We believe
that participation in such projects increases our exposure to new technologies,
products and potential customers.  These
programs provide royalty-free funding to consortiums of industrial companies
and academic institutions aimed at improving the competitiveness of European
industry through technological research and development, partnerships and
strategic alliances.  Through December
31, 2002 we have obtained approvals for grants for ten research and development
projects for a total amount of approximately $3.5 million (of which
approximately $3.1 million has already been offset against research and
development expenses). Through our participation in the EC projects, Optibase
is now widely recognized as a leader in advanced digital multimedia
technologies.

30

---

---

| | Service and
  Support
| | ---------------------

We believe that providing a high level of
customer service and support is essential to our success.  Our technical support personnel provide
world-wide services through each of our main offices in Israel, United States,
China and Japan.  In the United States,
we provide the first-line of support. 
Outside of the United States, independent distributors provide the
first-line of support in their respective territories, while in Israel, we
provide a second-line of support.  We
also support customer inquiries via a unique web based Help Desk system to
which all our customers are linked, on-premises support, telephone and e-mail
support, and provide additional technical information on our Internet home
page.  We provide a one-year warranty on
our hardware products and a three month free software upgrade on our software
products.  We also organize technical
seminars from time to time to further enhance the technical knowledge of
distributors and resellers in the use of our products.

| | Manufacturing and
  Sources of Supply
| | -------------------------------------

Our manufacturing facilities, located in
Herzliya, Israel, perform procurement of components, final assembly, testing
and quality control of our products.  We
out-source assembly of hardware modules to multiple manufacturers in Israel who
work in accordance with our designs and specifications.  This outsourcing strategy has improved
product quality and our gross margins. 
Quality control of our products is conducted at various production
stages, both at the subcontractors and our facilities.  We have implemented a supplier qualification
program to ensure subcontractor quality standards.  We monitor board performance by way of statistical survey and a
reporting system that tracks boards from initial inspection to shipment.

To accommodate increased production levels, we
have initiated a program of subcontracting the manufacturing of high-volume
products to manufacturers who also procure the required components.  Under this system, we purchase fully
assembled and tested products at predetermined prices.  We intend to continue to outsource
additional products as production levels increase and we are satisfied as to
the quality control of our subcontractors. 
These types of arrangements will allow us to focus on the manufacture of
low-volume products, which are generally more complex in nature and require
more rigorous assembly, testing and quality control procedures.

Key components used in our VideoPlex Xpress, MovieMaker 200, MovieMaker, MM200S,
MM100S, MGW5100, MGW 2000,MediaPump and other products and systems
are presently available from, or supplied by, only one source and other
components are available from limited sources. 
These key components included, for example:

| |  | Video
  compression and decompression chips manufactured by LSI Logic which are used
  in our MPEG-1 and MPEG-2 encoders and decoders;                                                                                                                                                                              
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Processors
  compression chips manufactured by Equator Technologies Inc, which are used in
  our MGE400 and MM400 encoders;                                                                                                                                                                                         
| |  | SDI
  interface chips from Gennum;                                                                                                                                                                                                                                                                                  
| |  | Video A/D
  and D/A chips from Philips which are used in our encoders and decoders;                                                                                                                                                                                                                                 
| |  | Microprocessor
  and PCI bridge devices from Intel that are used in our MediaPump and
  MovieMaker boards;                                                                                                                                                                                                          
| |  | Decoder
  chips manufactured by Zoran Corporation, which are used in our decoders;                                                                                                                                                                                                                                  
| |  | Audio A/D,
  D/A and decompression chips manufactured by Crystal, which are used in our
  encoders and decoders;                                                                                                                                                                                                    
| |  | Motorola,
  Inc.s DSPs , which are included in our decoders and encoders;                                                                                                                                                                                                                                          
| |  | The MP503
  manufactured by Cyclone, the suppliers of one of our MediaPump hardware
  platforms; and                                                                                                                                                                                                                
| |  | Various
  modules, which are integrated in our new generation system, the MGW5100, as
  follows: Switch by PTI (PERFORMANCE Technologies, Inc), host by Motorola
  backplane and alarm board by Kaparel Corporation, Pentium module by Jumptech
  Adastra and Compact PCI platform by E.P.S. (Israel) TECH 1992 LTD.

31

---

---

Although
we generally do not have long term supply contracts with our suppliers, we have
in the past been able to obtain supplies
of components and raw materials in a timely manner and upon acceptable
terms.  We cannot assure you that we
will not face in the future interruptions or delays in supply of key
components.  The design of components to
replace any of these limited source components could require six months or
more, and our results of operations could be adversely affected in the event of
an extended interruption or delay.

| | Competition
| | -----------

As a
provider of high quality MPEG-based video products, we face actual and
potential competition from numerous competitors.  Our most direct competitors offer MPEG based encoding and
decoding hardware and software development tools similar to those we offer with
varying feature sets and at varying price ranges.  Actual and potential competitors include VideoTele Inc., Tandberg
Television ASA, Harmonic Inc., Minerva Inc., VBrick Systems Inc., Amnis Systems
(formerly Optivision, Inc.), Winnov Inc., Pinnacle Systems Inc., Sigma Designs,
Inc., Matrox, Vela Research, Inc., Darim Vision Ltd., Canopus, SkyStream Inc.,
DVS and Viewcast Inc. We also expect to see increasing indirect competition
from vendors of software encoders and decoders like Digital Rapids, Ligos and
Intervideo.

The
digital video products industry is undergoing a period of consolidation in
which companies, including some of our competitors, are participating in
business combinations.  These
combinations may result in the emergence of competitors who have greater market
share, customer base, sales force, product offering, and technology and
marketing expertise than we do.  To
compete effectively, we must continue to offer high-quality hardware platforms
and a robust, feature-rich software development kit.  We must also provide extensive technical support, allowing for
easy integration of our products with other systems, thereby reducing our sales
cycle time to system integrators.

We
expect price competition to escalate in the video networking industry.  We have consistently attempted to minimize
the effect of price reductions in the market by introducing more sophisticated
products at the top of our product line, and thereby maintain selling
prices.  However, anticipated
competition may force us in the future to lower product prices on a regular
basis and add new products and feature at lower prices.

We
must also continue to expand our product distribution channel, domestically and
internationally, by making sure that both video networking and content creation
products are covered by suitable and capable distributors.  We cannot assure you that we will be able to
compete effectively on these bases.

| | Intellectual Property
| | ---------------------

Our future
success and ability to compete are dependent, in part, upon our proprietary
technology.  We rely on patent, trade
secret, trademark and copyright law to protect our intellectual property.
Relating to technologies developed in Optibase Ltd., we hold five issued
patents, two granted in Israel and three granted in the U.S.  Also relating to these technologies, we have
five patent applications pending in the U.S., three of which concern MPEG-4
technologies. We have two PCT patent applications pending in the WIPO, one of
them relating to the MGW5100 and the other relating to MPEG-4.

We
have also acquired one issued patent in connection with the Viewgraphics
transaction, relating to the DVB splicing technology. In addition, with that
transaction we have also acquired seven pending patent applications in the U.S.
concerning our DVB technology. One of those applications is also pending in six
patent offices around the world.

We
cannot assure you that any patents will be issued pursuant to our current or
future patent applications or that patents issued to us will not be
invalidated, circumvented, challenged or licensed to others.  In addition, we cannot assure you that the
rights granted under any such patents will provide us with competitive
advantages.  We cannot assure you that
any patents issued to us will be adequate to stop unauthorized third parties
from copying our technology, designing around our patents or otherwise
obtaining and using our products, designs or other information.  In addition, we cannot assure you that
others will not develop technologies that are similar or superior to our
technology.  Furthermore, we believe
that factors such as the technological and creative skills of our personnel,
new product developments, product enhancements and marketing activities are
just as essential as the legal protection of proprietary rights to establishing
and maintaining a competitive position.

32

---

---

We
also rely on confidentiality agreements to protect our proprietary rights.  It is our policy to require employees and
consultants and, when possible, suppliers, to execute confidentiality agreements with us.  We cannot assure you that our efforts to
protect our proprietary rights will be adequate.  Litigation may be necessary to enforce our intellectual property
rights and to protect our trade secrets, and we cannot assure you that such
efforts will be successful.  In
addition, the laws of certain countries in which our products are licensed or
distributed do not protect our products and intellectual property rights to the
same extent as the laws of the United States or Israel.  Accordingly, effective trademark, copyright
and patent protection may be unavailable in certain foreign countries.  Our inability to protect our proprietary
rights effectively could have a material adverse effect on our business,
financial condition and results of operations.

Many
participants in the digital video market have a significant number of patents
and have frequently demonstrated a readiness to commence litigation based on
allegations of patent and other intellectual property infringement.  From time to time, we receive notices
relating to alleged infringement.  In
some cases, we have not received subsequent communications after responding to
the initial claim or we believe that the correspondence requires no further
action on our behalf.  In some other
cases, we have resolved the matters on commercially reasonable terms or
requested additional information in order to determine the merits of the
notice.  However, we cannot assure you
that future claims will be resolved on such terms, and failure to resolve such
claims on such terms could result in a material adverse effect on our business,
financial condition and results of operations. 
We expect that companies will increasingly be subject to infringement
claims as the number of products and competitors in our industry segment grows
and the functionality of products in different industry segments overlaps.  Responding to such claims, regardless of
merit, could cause product shipment delays or require us to enter into royalty
or licensing arrangements to settle such claims.  Any such claims could also lead to time-consuming, protracted and
costly litigation, which would require significant expenditures of time,
capital and other resources by our management. 
Moreover, we cannot assure you that any necessary royalty or licensing
agreement will be available or that, if available, such agreement could be
obtained on commercially reasonable terms.

| | Effect of Government Regulation of our
  Business
| | -------------------------------------------------

Regulation
of our business by the Israeli government affects our business in several ways.
We benefit from certain tax incentives promulgated by the government of Israel,
including programs sponsored by the Office
of Chief Scientist, or OCS, of the Israeli Ministry of Industry and Trade, for
the support of research and development activities. We also obtained funding
from the MOST and STRIMM consortium, which is a part of the OCS Magnet
program.  We are subject to Israeli
Companies Law, which regulates the activities of companies incorporated in Israel.
Please see the section entitled Risks Related to Operating in Israel 
in Item 3.D. Risk Factors, as well as Item 10. Additional
information, for more information on the effects of governmental regulation of
our business.

| | 4.C Organizational Structure
| | ----------------------------

Optibase has two wholly owned subsidiaries:
Optibase Inc. in the United States, and Optibase B.V. in the Netherlands.  Incorporated in 1991 and currently located
in Mountain View, California, Optibase Inc. manages our North American sales,
marketing and customer support activities. Optibase Europe Ltd., a former
subsidiary of Optibase was dissolved in July 2002.   Immediately following the acquisition of Viewgraphics in
December 2000, Viewgraphics operated as a wholly owned subsidiary of Optibase,
Inc. under the name Optibase U.S., Inc., which was merged into Optibase Inc. in
June 2001.  We currently maintain our
sales activities in Europe through local employees residing in various European
countries.  We have such offices in
Austria and France, while the activity in other countries is managed directly
from Israel.  In 1999 and 2000, we
established offices in Japan and in China in order to cultivate closer
relationships with local sales forces and potential system integrators and to
expand our business development activities in the local markets.

| | 4.D Property, plants and equipment
| | ----------------------------------

Our
headquarters are located in offices occupying approximately 25,385 square feet
in Herzliya Pituach, Israel, out of which 2,902 square feet are subleased.  Our lease on this space expires on December
31, 2008.

Optibase,
Inc.s headquarters occupy approximately 15,000 square feet in Mountain View,
California. The current lease expires on July 31, 2006.

33

---

---

At
the present time, we maintain small
one-man offices in France and Austria. We also rent an office of
approximately 1,496 square feet in Beijing, China pursuant to a one-year lease
that will expire in December 2003.

Item 5. Operating and Financial Review and Prospects

The following discussion and analyses about our
financial condition and results of operations contain forward-looking
statements that involve risks and uncertainties.  Our actual results could differ materially from the results
discussed in the forward-looking statements. 
Factors that could cause or contribute to such differences include, but
are not limited to, those set forth under 3.DRisk Factors Section 5.DTrend
Information, as well as those discussed elsewhere in this Annual Report.  You should read the following discussion and
analysis in conjunction with the Selected Consolidated Financial Data and the
Consolidated Financial Statements included elsewhere in this Annual Report.

| | Overview
| | --------

We
provide high-quality, cost-effective products that enable the preparation and
delivery of digital video based on MPEG and Windows MediaTM over
ATM, DVB, the Internet protocol (IP) and other packet-based networks.    We have created a breadth of product
offerings used in applications such as delivery of video over broadband
networks, digital video archiving, distance learning and business
television.  We were founded in 1990 and
have experienced a decrease in our level of revenues in recent years, from $30.7
million in revenues in 2000 to $29.4 million in revenues in 2001 and $20.4
million in revenues in 2002.  However,
our net loss has decreased to a net loss of $12.9 millions in 2002 from a net
loss of $39.1 million in 2001 after increasing from a net loss of $8.96
millions in 2000.  The recent decreases
in our net loss were mainly a result of the managements efforts to reduce operating expenses and improve
financial performance beginning in the third quarter of 2001. As of December
31, 2002, we had accumulated losses of $64.2 million.

Since
our commencement of operations in 1990, we have made significant investments in
research and development, focusing on MPEG-based digital video technology and
expanding into next generation of broadband networks.  We have regularly introduced new products and enhancements and
other modifications of our existing products.

MPEG-1
specifications were substantially finalized in 1991.  In 1992, we introduced our first MPEG-l decoder and introduced
our first real-time MPEG-l encoder in late 1993.  MPEG-2 specifications were substantially finalized in 1993.  By 1995, we had released our first MPEG-2
decoder and, in 1996, our first MPEG-2 encoder.  Since 1996, we have combined our video streaming transfer
products and extensive MPEG experience to introduce a series of networking
products.  Since 1993, we have produced
content creation tools.  In 1995, we
introduced our video CD content creation tool. 
We further developed our content creation product line by introducing
our MPEG-based DVD content creation tool DVDFab! in 1998.  In the first quarter of 2000, we released MPEG ComMotion Pro, which is a scalable,
Web-based networking software application enabling the transmission of MPEG-1
and MPEG-2 digital video and MP3 digital audio over private broadband
networks.  In November 2000, we released
our MGW 2000, first product of our new MGW product line, which provides
streaming media gateway solutions for enterprises and broadband markets.  In November 2002, we released the MGW 2400,
which enables direct streaming of video into the Internet, Intranets and other
broadband IP networks in MPEG-4 and WMT formats. In December 2002, we released
the MGW 5100, a carrier class product that enables encoding, transcoding and
streaming of video over  broadband IP
networks. With the acquisition of Viewgraphics in the year 2000, two main new
product families were added to our product portfolio  the MediaPump 503 DVB to
PCI interface product line and the VideoPump uncompressed SDI to PCI interface
products. During 2001, the MediaPump was redesigned and enhanced, and an
entirely new and improved product family, the MediaPump 533 was introduced. We
also introduced the MGW 3100 DVB/IP Gateway system, based on the MediaPump
products. In the third quarter of 2002, due to the loss of SeaChange as a
customer of our MediaPump products and after assessing market conditions, we
decided to cease additional research and development efforts for the MediaPump,
VideoPump and the MGW 3100. We also decided to shut down the VideoPump and MGW
3100 product lines, while continuing to support and sell the MediaPump.

34

---

---

Critical
Accounting Policies

Our
critical accounting policies are as follows:

| | Revenue
  recognition;                                                                                                               
|- | -------------------------------------------------------------------------------------------------------------------------------------
| | Estimating
  valuation allowances and accrued liabilities, specifically the trade
  receivable allowances for doubtful debts;        
| | Inventories;                                                                                                                         
| | Review of
  goodwill, intellectual property and other intangible assets arising on
  capitalized purchased technology for impairment;
| | Review of
  equity investments for impairment;                                                                                       
| | Review of
  marketable securities investments for classifications and impairment; and                                                
| | Review for
  impairment of intangible assets.                                                                                        

Revenue
recognition

We
generate revenues mainly from the sale of hardware products and also from insignificant sales of software products.
We sell our products worldwide through distributors, systems integrators, VARs
and OEMs who are considered end-customers.

Revenues
from product sales are recognized in accordance with Staff Accounting Bulleting
No. 101, Revenue Recognition in Financial Statements (SAB No. 101), as
amended, when persuasive evidence of an agreement exists, delivery of the
product has occurred, the fee is fixed or determinable and collectibility is
probable. Upon delivery, titles and risks are transferred to the customer and
no significant obligations exist after delivery has occurred. Estimated
warranty costs, which are insignificant, are based on our past experience and
are accrued in the financial statements.

Revenues
from software sales, which are insignificant, are recognized according to
Statement of Position No. 97-2, Software Revenue Recognition (SOP No. 97-2)
(as amended). Therefore, revenues from software sales are recognized when
delivery has occurred, persuasive evidence of an arrangement exists, the
vendors fee is fixed or determinable and collectibility is probable. Upon
delivery, titles and risks are transferred to the customer and no significant
obligations exist after delivery has occurred.

Deferred
revenues include amounts received from customers and goods shipped to
customers, for which revenue has not yet been recognized.

We
assess collection based on a number of factors, including past transaction
history, credit worthiness of the customer and in some instances a review of
the customers financial statements. We insure a substantial part of our
customers with credit insurance in cases of bankruptcy.

We recognize maintenance over the contractual period for the maintenance, which
is generally one-year. Maintenance is available at multiple levels of support.
Quotes are optional and depend on whether a customer chooses to buy a
maintenance contract or not.

Our arrangements do not generally include an acceptance requirement. However if
such an acceptance provision exists, then revenue recognition is deferred until
written acceptance of the product has been received from the customer. All of
our agreements in which revenues are recognized are non-refundable and
non-cancelable.

Estimating
valuation allowances and accrued liabilities, specifically the trade receivable
allowance for doubtful debts

We
review on a continuing basis the uncollectibility of the trade accounts receivable
and the adequacy of the allowance for doubtful debts against the trade
receivables. We specifically analyzes customer accounts, account receivable
aging reports, history of bad debts and the business or industry sector to
which they belong, customer concentrations, customer credit-worthiness, current
economic trends and any other pertinent factors that come to light and to our
attention. Generally a provision will be made when a trade receivable becomes
90 days past due. In exceptional cases, a provision after 90 days past due will
be waived when, after due diligence with the customer, we are confident that
the receivable is still collectible and the customer has demonstrated that
payment is forthcoming. During fiscal year 2002, we provided for approximately
$75,000 of doubtful debt provision. In addition, we provide approximately 2% of
the trade receivable amount as general provision of doubtful debt.

35

---

---

We
are able to make reasonably objective judgments on the adequacy of other
provisions relating to trade accruals. In the case of contingent liabilities,
no provision has been made. This has involved significant judgment that either
we will prevail in the case of litigation or have sufficient insurance to cover
an adverse outcome of any such material proceeding.

| | Inventories
| | -----------

Significant
judgment is required to determine the reserve for obsolete or excess inventory.
Inventory on hand may exceed future demand either because the product is
outdated or obsolete, or because the amount on hand is more than can be used to
meet future need, or excess. We also provide for the total value of inventories
that we determine to be obsolete based on criteria such as customer demand and
changing technologies. On December 31, 2002, our inventory reserves were
approximately $859,000, or 16.9% of our $5.1 million gross inventories.

We
value our inventories at the lower of cost or market.

Review
of goodwill, intellectual property and other intangible assets arising on
capitalized purchased technology for impairment

We
assess the impairment of long-lived assets and related goodwill, intellectual
property and other intangibles whenever an event occurs that indicates that the
carrying value may not be recoverable. The factors we consider important in
this assessment include but are not limited to the following:

| | Significant
  changes in the manner of our use of the acquired assets or our strategy; and
|- | ------------------------------------------------------------------------------------------
|  |                                                                                           
| | Significant
  negative industry or economic trends.                                       

The
determination that the carrying value of intangibles, long-lived assets and
goodwill arising on the purchase of intellectual property may not be
recoverable is based upon the existence of one or more of the above factors. We
assess whether impairment exists by conducting an impairment review in which we
compare the carrying value of the assets to their fair value in accordance with
SFAS 142.

In
2002, SFAS 142 became effective. During 2002 we implemented the impairment
tests required by SFAS 142. Accordingly, a transitional goodwill impairment
loss of $854,000 as of January 1, 2002 was recorded as the cumulative effect of
a change in accounting principle in our consolidated statement of operations.

In
August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which is effective for fiscal years beginning
after December 15, 2001. As discussed in Note 2 to the Consolidated
Financial Statements, we adopted SFAS 144 in January 2002. In the second
quarter of 2002, we reassessed the technology acquired from Viewgraphics in
December 2000, and determined that it was unlikely that any future value would
be realized from such technology. As of June 30, 2002, the carrying value
of the technology, which was recorded as intangibles, was $6.8 million.
Based on SFAS No. 144, our intangible assets carrying value of
$6.8 million was in excess of its fair value of zero. Therefore, we
wrote-off the $6.8 million carrying value of our intangible assets as of
June 30, 2002. Net intangible assets at December 31, 2002 amounted to
$220,000.

Review
of Equity Investments for impairment

We
have made certain equity investments in other companies, which the management
believes are in our best interest and may promote our strategic objectives.
Before investments are executed, they are approved by our executive management
and our board of directors. Generally, management designates an executive staff
member to either serve on the board of directors of the investee as a voting
member or serve as an observer. This process assists management in monitoring
the investment and in determining when an impairment review of the investment
may be required. Our management performs a review of equity investments on a
quarterly basis to determine if a provision for impairment is required. This
process, while based on reasonably objective evidence supplied by the investee,
is combined with due diligence sought from general economic trends and
indicators. Significant management judgment is made when conducting these
reviews and future developments in the investee may result in the impairment
provision becoming a write-off or reversed to some extent.

36

---

---

Review
of marketable securities investments for impairment

As
of December 31, 2002 all marketable securities investments are classified as
available for sale and recorded at fair value, and unrealized investment gains
and losses are reflected in shareholders equity. Investment income is recorded
when earned. Investments are reviewed periodically to determine if they have
suffered an impairment of value that is considered other than temporary. If
investments are determined to be impaired, a capital loss is recognized at the
date of determination.

Testing
for impairment of investments also requires significant management judgment.
The identification of potentially impaired investments, the determination of
their fair value and the assessment of whether any decline in value is other
than temporary are the key judgment elements. The discovery of new information
and the passage of time can significantly change these judgments. Revisions of
impairment judgments are made when new information becomes known, and any
resulting impairment adjustments are made at that time. The current economic
environment and recent volatility of securities markets have increased the
difficulty of determining fair value and assessing investment impairment. The
same influences tend to increase the risk of potentially impaired assets.

| | 5.A Operating results
| | ---------------------

| | Revenue and Sales
| | -----------------

The
following table sets forth, for the periods indicated, the percentage of total
consolidated sales derived from sales into each of the regions identified in
the table, regardless of the operating unit, which generated the sale.  For certain financial information presented
on the basis of geographic operating units, please see note 15a to our
Consolidated Financial Statements included elsewhere in this Annual Report.

|                                  |  | Year Ended December 31, |   
|--------------------------------- |  | ----------------------- | --
|                                  |  |                         |   
|Region                            |  | 2000                    |   
|                                  |  |                         |   
|North America                     |  |                         | 48
|Europe                            |  |                         | 15
|Far East                          |  |                         | 21
|Other countries, including Israel |  |                         | 16

The percentage of our revenues derived from sales
into North America increased in 2002 compared to 2001.  The increase resulted primarily from higher
sales and marketing efforts in North America. At the same time our revenues in
dollar amount from sales in North America decreased as a result of the ongoing
weakness in the technology sector and the loss of SeaChange as a customer of
our MediaPump products, which significantly reduced our revenues beginning in
the second quarter of 2002. Our sales into Europe decreased in terms of
absolute dollars and as a percentage of our total revenues during this period,
due to weak market conditions in Europe. 
Revenues derived from sales into the Far East had also decreased in 2002
as a result of a reduction of sales by one of our main distributors in the
region.  The significant decrease in
sales in other countries, including Israel, in 2002 primarily reflects slow
orders from Gilat Satellite Networks as well as the ongoing weakness in the
technology sector.

In North America, we sell directly to system integrators,
OEMs and value-added resellers, or VARs. 
Outside of North America, we sell directly to system integrators, OEMs,
VARs and other distributors.  Sales of
our products to system integrators can involve a lengthy process and the timing
of volume orders from system integrators can be difficult to forecast.  As a result, revenues may fluctuate from
quarter to quarter depending on the timing and volume of orders.  Since these types of customers typically
request initial delivery within four to eight weeks of their placement of
orders, we have historically had a minimal backlog of orders.  Combined sales to our three leading system
integrators accounted for 30% of our revenues in 2000, 23% of our revenues in
2001 and 30% of our revenues in 2002. 
Combined sales by three leading distributors of our products accounted
for 13% of our revenues in 2000, 13% of our revenues in 2001 and 14% of our
revenues in 2002.

37

---

---

The majority of our revenues are derived from
sales of our standard product offerings. 
Additionally, from time to time, we have the opportunity to develop
customized products, which require varying amounts of modifications to our
standard products and existing technology. 
Except for those situations that provide the potential for large orders
or strategic relationships with well-known market leaders, we attempt to limit
our commitments for customized products. 
The percentage of revenues represented by standard products and
customized products, respectively, fluctuates from period to period depending
on a variety of factors, including the number, size and timing of customized
product activities.  In each of 2001 and
2002, special engineering projects accounted for less than 3% of revenues.

Generally, we recognize revenues when persuasive
evidence of an agreement exists, delivery of the product has occurred, the fee
is fixed or determinable, collectibility is probable and no significant future
obligations exist.  Revenues from
software sales are recognized when delivery has occurred, persuasive evidence
of an arrangement exists and the vendors fee is fixed or determinable and
collectibility is probable.  We
recognize revenues from large customized project contracts according to the
percentage of completion method of accounting, based on the contractual value
of the work performed up to the balance sheet date, and the ratio of actual
cost incurred to total contract costs.

| | Research
  and Development
| | --------------------------

We participate in programs sponsored by the
Office of Chief Scientist, or OCS, of the Israeli Ministry of Industry and
Trade, for the support of research and development activities.  Through December 31, 2002, we had
received grants from OCS aggregating $3.9 million for certain of our research
and development projects.  We are obligated
to pay royalties to the OCS of 3% to 5% of the sales of the products and other
related revenues developed from such projects, up to an amount equal to 100% of
the grants received linked to US dollar. 
Royalties on grants recorded for programs beginning on or after
January 1, 1999 bear interest linked to the London Interbank Offered Rate,
or LIBOR.  Through December 31,
2002, we have accrued and paid royalties to the OCS in the aggregate amount of $2.8
million.  At December 31, 2002, the
aggregate OCS contingent liability was $1.1 million.  We consider any royalties paid in respect of these grants as a
cost of revenues.  Please see
Note 11b to the Consolidated Financial Statements for a more complete
discussion of these grants.

We also obtained funding from the MOST and STRIMM
consortium, which is a part of the OCS Magnet program.  The Magnet is a royalty-free program,
encouraging cooperation among industrial companies and research institutions.  Human resources and funds are pooled to advance
knowledge and technological development in highly specialized fields.  The MOST consortium project terminated on
March 31, 2000.  The STRIMM
consortium started in July 2000 and during May 2003 plans were submitted and
are waiting OCS approval for an additional two years that will last until July
2005.  Through December 31, 2002,
we obtained grants from the MOST and STRIMM consortium aggregating $3.4
million.

We are taking part in non-royalty joint
development projects with large European companies, such as Philips research,
Deutsche Telekom, TDF, Aerospatiale Matra, Beta Research and THALES conducted
under the auspices of, and with financial assistance from, the European Union
Research and Development Programs (the Fourth and Fifth Framework Programs for
Research and Technological Development, or EU RTD).  Among the goals of these projects are providing solutions aimed
at bridging between video streaming standards for the broadband and narrowband
Internet and the development of tools and applications for the creation and
distribution of digital video content. 
We believe that participation in such projects increases our exposure to
new technologies, products and potential customers.  The EU RTD provides royalty-free funding to consortiums of industrial
companies and academic institutions. 
These programs aim to improve the competitiveness of European industry
through technological research and development, partnerships and strategic
alliances.  We have obtained approval
for grants for ten research and development projects for a total amount of $3.5
million, of which $3.1 million has been offset through December 31, 2002
against research and development expenses.

Our software development costs are charged to
income as incurred until technological feasibility is determined.  Upon establishment of technological
feasibility for the relevant product, we capitalize software costs in
accordance with Statement No. 86 Accounting for the Cost of Computer Software
to Be Sold, Leased or Otherwise Marketed, of the Financial Accounting
Standards Board.  Under this policy, we
capitalized research and development expenditures equal to $80,000 in 2000,
$160,000 in 2001 and $120,000 in 2002. 
We amortize capitalized software costs on a product-by-product basis
commencing with general product release by the greater of the amount computed
using:  (1) the ratio that current
gross revenues from sales of the software bear to the total of current and
anticipated future gross revenues from sales of that software, or (2) the
straight-line method over the estimated useful life of the product (three to
five years).  We recognized amortization
expenses on proprietary software equal $64,000 in 2000, $60,000 in 2001 and
$54,000 in 2002.  In the event that the
software development net costs exceed the net realizable value of the product,
we will write down the costs to net realizable value.

38

---

---

We cannot assure you that any of the types of
research and development grants we previously received will remain available in
the future upon their current terms or at all, or, if such types of grants are
available, that we will qualify to receive further grants.  Israeli companies are generally subject to
income tax at the corporate rate of 36%. 
However, we are eligible for certain tax benefits which should result in
our income being taxed at a rate which is significantly lower than the maximum
rate for some time after we begin to report taxable income and exhaust our net
operating loss carry-forward.  Please
see Item 10.E  Taxation.

| | Compensation
  Expenses
| | -----------------------

Through the year 2000, we recorded deferred stock
compensation of $6.5 million, relating to share options and escrow held shares
granted with an exercise price below the deemed fair market value of our outstanding
ordinary shares on the date of the grant. 
Deferred stock compensation expense related to share options is
allocated to expenses relating to the employees who received those share
options and is recognized as the options vest. 
Amortization of deferred stock compensation and escrow held shares
expense of $353,000, $2.2 million and $1.4 million was recognized in the years
2000, 2001 and 2002 respectively.  Of
the total deferred stock compensation expensed in 2002, $1.2 million was
recorded as research and development expenses, $21,000 was recorded as general
and administrative expenses and $167,000 was recorded as selling and marketing
expenses.  Please see Note 2t to
the Consolidated Financial Statements. To date deferred stock compensation in
our balance sheet totals at approximately $132,000, and we expect all of which
will be amortized by the end of fiscal year 2003.

| | Statement
  of Operations
| | -------------------------

Since our inception in 1990 until December 31,
2002, we have accumulated losses of $64.2 million. We did not become profitable on an annual basis until 1997. We
were profitable starting from the quarter ended September 30, 1997 until
the quarter ended September 30, 2000. We incurred a net loss of $12.9 million
for fiscal year 2002. Our operating
results for future periods will continue to be subject to numerous
uncertainties and we cannot assure you that we will be able to return to
profitability on a quarterly or annual basis in the future. Historical results are not necessarily
indicative of the results to be expected in the future and results of interim
periods are not necessarily indicative of results for the entire year. Please see Item 3.D -Risk Factors and Item
5.D Trend Information.

The
following table sets forth, for the periods indicated, from our consolidated
statements of operations data as percentages of our revenues:

39

---

---

|                             |                                                                      | Year Ended December 31, |      
|---------------------------- | -------------------------------------------------------------------- | ----------------------- | -----
|                             |                                                                      |                         |      
|                             |                                                                      | 2000                    |      
|                             |                                                                      |                         |      
|Revenues                     |                                                                      |                         | 100.0
|Cost of revenues             |                                                                      |                         | 42.7 
|Gross margin                 |                                                                      |                         | 57.3 
|Operating expenses:          |                                                                      |                         |      
|                             | Research and development, net                                        |                         |      
|                             | Selling and marketing, net                                           |                         |      
|                             | General and administrative                                           |                         |      
|                             | Impairment of acquired intangibles                                   |                         |      
|                             | Restructuring cost                                                   |                         |      
|                             | In process research and development write off                        |                         |      
|                             | Total operating expenses                                             |                         |      
|Operating (loss)             |                                                                      |                         | (45.8
|Other income (expenses), net |                                                                      |                         | 0.03 
|Financial income, net        |                                                                      |                         | 16.6 
|                             | Net (loss) before tax                                                |                         |      
|                             | Provision for tax                                                    |                         |      
|                             | Loss after income tax                                                |                         |      
|                             | Equity in loss of affiliate                                          |                         |      
|                             | Net loss before cumulative effect of changes in accounting principle |                         |      
|                             | Cumulative effect of changes in accounting principle                 |                         |      
|                             | Net (loss)                                                           |                         |      
|                             |                                                                      |                         |      
|                             |                                                                      |                         |      

| | Results of Operations for the Years Ended 2002 and 2001
| | -------------------------------------------------------

Revenues. 
Revenues consist of gross sales of products, less discounts, refunds and
returns.  Our revenues decreased by
30.6% to $20.4 million in 2002 from $29.4 million in 2001.  The decrease resulted primarily from the
overall weakness in the technology market following the September 11, 2001
terrorist attacks in the United States, and the loss of SeaChange as a customer
of our MediaPump products, which have significantly reduced our revenues for
the second quarter of 2002 and affected us in the following quarters of 2002.
We have also experienced a reduction in sales of our MGW 2000 product line to
approximately $2.7 million in 2002 from approximately $4.2 million in 2001,
which was partially offset by approximately $1.1 million sales of V.box
products, which started in 2002. Revenues in North America in 2002 were down in
absolute dollar amount, but were up as a percentage of total revenues. This
percentage increase resulted primarily from worse market conditions in Europe
and the Far East compared to those in North America.

Cost
of Revenues.  Cost of revenues consists primarily of raw material
costs, costs of subcontracting manufacturing and assembly, labor expense,
write-off of obsolescence inventory, royalty payments made to the OCS,
amortization of capitalized software development costs, other acquisition
related costs and allocated overhead attributable to our production
operations.  Cost of revenues decreased
by approximately 31.6% to $10.3 million in 2002 from $15 million in 2001.  Cost of revenues as a percentage of revenues
decreased to approximately 50.3% in 2002 compared to approximately 51% in 2001.
The decrease was primarily due to acquisition-related costs, which were
impaired during the quarter ended June 30, 2002 and were not charged to the
cost of revenues thereafter, as well as the overall weakness in the technology
market which led to reduction in prices of our raw materials and in our
manufacturing costs. During 2002, we started manufacturing and selling V.box
products, which as a percentage of revenues have a higher cost compared to the
other product lines. We expect cost of revenues to fluctuate as a percentage of
revenues in the future depending, in part, on our product mix.

Research
and Development Expenses, Net. Research and development
expenses, net, consist primarily of labor expenses, development-related raw
materials, acquisition related costs and stock option compensation charges and
related overheard, offset by grants. 
Research and development expenses, net, decreased by approximately 47.8%
to $8.1 million in 2002 from $15.6 million in 2001.  As a percentage of revenues, research and development expenses,
net, decreased to approximately 39.8% in 2002 from approximately 52.9% in
2001.  Amortization of intangible assets
and deferred stock compensation expenses beginning in the fourth quarter of
2000, as a result of the acquisitions of Viewgraphics and HiTV, decreased to
$1.5 million in 2002 from $4.4 million in 2001. In addition, the decrease in
research and development expenses can primarily be attributed to the decrease
in labor and subcontractors costs. Research and development grants received
from the OCS Magnet and the EC increased to $2.2 million in 2002 from $1.8
million in 2001. We expect research and development expenses, net to decrease
in absolute dollars in the future, primarily due to the impairment of
intangibles that was made during 2002. As a result those intangibles assets are
no longer amortized as part of research and development expenses, net. We are
also continuing our ongoing efforts to reduce operating expenses and improve
financial performance.

40

---

---

Selling
and Marketing Expenses, Net.  Selling and marketing expenses,
net, consist primarily of compensation expenses, promotional expenses, travel,
royalties paid to the Marketing Fund and related overhead and expenses.  Selling and marketing expenses, net,
decreased approximately in 26.3% to $8 million in 2002 from $10.8 million in
2001.  As a percentage of revenues,
selling and marketing expenses, net, increased to approximately 39.1% in 2002
from approximately 36.9% in 2001.  The
dollar decrease in selling and marketing expenses is primarily due to a
reduction in sales compensation expenses and reduction in tradeshows and Marcom
activities.  Selling and marketing
expenses will fluctuate as a percentage of revenues, depending, in part, on
fluctuations in the level of revenues.

General
and Administrative Expenses.  General and administrative
expenses consist primarily of compensation costs, fees to outside consultants,
legal and accounting fees, acquisition related costs and stock option
compensation charges and certain office maintenance costs.  General and administrative expenses
decreased approximately 58.4% to $2.1 million in 2002 from $4.9 million in
2001.  As a percentage of revenues,
general and administrative expenses decreased to approximately 10% in 2002 from
approximately 16.7% in 2001.  The
decrease is due primarily to a decrease in amortization of intangible assets
and deferred stock compensation expenses resulting from the purchase of
Viewgraphics and HiTV during the forth quarter of 2000, totaling $21,000 in
2002 compared to $1.5 million in 2001, reduced labor costs, decreasing usage of
consultants and experts, decreased provision for doubtful accounts partially
offset by an increase in insurance costs.

Impairment
of Acquired Intangibles and related tangible assets.  In
September 2001, following a continued decrease in our market capitalization we
implemented an impairment test on our acquired intangibles. As a result of the
analysis (conducted by an independent evaluator) we recorded expenses totaling
$20.9 million due to impairment of acquired intangibles. Under the new
accounting rules published in June 2001, by the Financial Accounting Standard
Board, SFAS 141 and SFAS No. 142 effective for fiscal years beginning after
December 15, 2001, goodwill and intangible assets will be subjected to annual
impairment tests. In August 2001, the FASB issued SFAS 144 which is
effective for fiscal years beginning December 15, 2001. SFAS 144 supersedes
FASB Statement No. 121, Accounting for the Impairment or Disposal of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the
accounting and reporting provisions relating to the disposal of a segment of a
business under Accounting Principles Board Opinion No. 30. Because in the second quarter of 2002 we lost SeaChange as
a customer of our MediaPump products and due to the decrease in our market
value at that time, we have reassessed several assets, mainly intangibles, in
our financial statements. Impairment of these assets was required according to
the rules of SFAS 144. As a result, we recorded impairment charge of acquired
intangibles totaling approximately $6.8 million during 2002.

Restructuring
cost.  In the third quarter of 2002, due to the
loss of SeaChange as a customer of our MediaPump products and after assessing
markets conditions, we decided to cease additional research and development
efforts for the MediaPump, VideoPump and the MGW 3100. We also decided to shut
down the VideoPump and MGW 3100 product lines. As a result we incurred
restructuring costs totaling approximately $505,000, which costs were comprised
mainly of expenses related to the reduction in workforce and write-off of
assets related to that reduction. In September 2001, as part of the
managements aggressive efforts to tighten cost controls and improve financial
performance, we underwent a restructuring process. The restructuring costs,
totaling approximately $2.1 million, were comprised mainly of expenses related
to the reduction in workforce and write-off of assets related to that
reduction.

Operating
Income.  As a result of the foregoing, we recorded
operating loss of $15.3 million in 2002 compared with an operating loss of
$39.9 million during 2001.

41

---

---

Other
Income (Expenses), Net.  We recorded other expenses of $14,000 in
2002, compared to other income of $4,000 in 2001.  Both expenses and income in 2002 and 2001 are related to a sale
of fixed assets.

Financial
Income (Expenses), Net.  Financial expenses consist
primarily of interest we paid on bank credit lines.  Financial income consists mainly of interest received on deposits
and other financial assets held in our bank accounts and gains from realization
of securities. Exchange differences occur as a result of the change of the NIS
value relative to the U.S. dollar.  We
recorded financial income, net of financial expenses, of $3.7 million in 2002,
compared with $875,000 million in 2001. 
The increase in 2002 resulted primarily from higher yields on certain
investment graded financial investments made through 2002, also our financial
income, net, during 2001 suffered due to an other than temporary impairment of
financial instruments of approximately $1.8 million, which did not occur in
2002.

Net
loss before tax.  We recorded a net loss before tax of $11.6
million in 2002, compared with a net loss before tax of $39.0 million in 2001.

Provision
for tax. We have
completed our tax assessments with the tax authorities in Israel for the fiscal
years 1997 through and including 2001. As a result we have made additional
provisions of approximately $124,000 in 2002 further to the provision made in
2001 of approximately $67,000.

Loss
after income tax.  We recorded a net loss after income tax of
$11.7 million in 2002, compared with a net loss before tax of $39.1 million in
2001.

Equity
in loss of affiliate.  In respect of an investment we
made in V.Box Communication Ltd,, we
implemented the hypothetical liquidation method in accordance with EITF 99-10
and APB 18, in measuring our relative part in the invested company financial
results. Equity in loss of affiliate totaled approximately $325,000 in 2002.

Net
loss before cumulative effect of changes in accounting principle.  We
recorded a net loss before cumulative effect of changes in accounting principle
of $12.1 million in 2002, compared to $39.1 million in 2001.

Cumulative
effect of changes in accounting principle.  During
the second quarter, ended June 30, 2002 and according to the requirements of
SFAS 142, we completed our goodwill impairment analysis and recognized a
transitional goodwill impairment loss of $854,000 as of January 1, 2002, which
was recorded as the cumulative effect of a change in accounting principle in
our consolidated statement of operation.

Net
loss.  We recorded net loss of $12.9 million in
2002, compared with a net loss of $39.1 million in 2001.  As a percentage of revenues, net loss
decreased to approximately 63.2% of revenues in 2002 compared to approximately
132.9% of revenues in 2001.

| | Results of Operations for the Years Ended 2001 and 2000
| | -------------------------------------------------------

Revenues.  Our
revenues decreased by 4.1% to $29.4 million in 2001 from $30.7 million in
2000.  The decrease resulted primarily
from the overall weakness in the technology market following the September 11,
2001 terrorist attacks in the United States. However, we were able to maintain
this level of sales due to strong sales of our products to SeaChange mainly of
the MediaPump and the MovieMaker 200 Encoder of approximately $3.8 million,
strong sales of other products integrated from Viewgraphics of approximately
$4.4 million and sales of approximately $4.2 million of our Media Gateway
family product line.  These sales
partially compensated the reduction in revenues coming from Harmonic, Cisco and
Gilat.  Revenues in North America in
2001 were both up in absolute dollar amount and as a percentage of revenues,
mainly as a result of sales to SeaChange and the revenues of Viewgraphics
integrated products.

Cost
of Revenues.  Cost of revenues increased by approximately
14.6% to $15 million in 2001from $13.1 million in 2000.  Cost of revenues as a percentage of revenues
increased to approximately 51% in 2001 compared to approximately 42.7% in 2000.
The increase was primarily due to acquisition-related costs totaling $1.2
million during 2001, the integration process with Viewgraphics, the increase in
product offering and the aggressive competition. These costs will continue to
influence our cost of revenues until 2005.

42

---

---

Research
and Development Expenses, Net. Research and development
expenses, net, increased by approximately 149% to $15.6 million in 2001 from
$6.2 million in 2000.  As a percentage
of revenues, research and development expenses, net, increased to approximately
52.9% in 2001 from approximately 20.3% in 2000.  As part of our strategy to speed up the commercialization of our
new family product line of the Media Gateway, we had increased our Research and
Development expenses, mainly labor costs. 
In addition, as a result of the acquisition of Viewgraphics and HiTV, we
faced an increase in amortization of intangible assets and deferred stock compensation
expenses beginning in the fourth quarter of 2000, totaling $4.4 million in 2001
and $600,000 in the fourth quarter of 2000. 
Research and development grants received from the OCS Magnet and the EC
increased to $1.8 million in 2001 from $1.4 million in 2000.

Selling
and Marketing Expenses, Net.  Selling and marketing expenses,
net, increased approximately by 24.5% to $10.8 million in 2001 from $8.7
million in 2000.  As a percentage of
revenues, selling and marketing expenses, net, increased to approximately 36.8%
in 2001 from approximately 28.4% in 2000. 
The dollar amount increase in selling and marketing expenses is
primarily due to increased sales commission volume, increased costs and
marketing activities of our United States operations, our office in Japan, and
our new office in China, and the decrease in grants received from the Marketing
Fund.  The increase was partially offset
by decreasing royalties.

General
and Administrative Expenses.  General and administrative
expenses increased approximately by 118% to $4.9 million in 2001 from $2.3
million in 2000.  As a percentage of
revenues, general and administrative expenses increased to approximately 16.7%
in 2001 from approximately 7.4% in 2000. 
The increase is due primarily to increased labor costs and increased legal
and expert fees.  In addition, as a
result of the purchase of Viewgraphics and HiTV, we faced an increase in
amortization of intangible assets and deferred stock compensation expenses from
the fourth quarter of 2000, totaling $1.5 million in 2001 and $251,000 in the
fourth quarter of 2000.

Impairment
of Acquired Intangibles.  In September 2001, following a
continued decrease of our market capitalization we implemented an impairment
test on our acquired intangibles. As a result of the analysis (conducted by an
independent evaluator) we recorded expenses totaling $20.9 million due to
impairment of acquired intangibles.

Restructuring
cost.  In September 2001, as part of our efforts to
tighten cost controls and improve financial performance, we underwent a
restructuring process. The restructuring costs, totaling approximately $2.1
million, were comprised mainly of expenses related to the reduction in
workforce and write-off of assets related to that reduction.

In
Process Research and Development.  In
December 2000, we acquired Viewgraphics. 
As part of the acquisition and under current purchase accounting rules
we recorded during the fourth quarter of 2000 a one-time write-off of $14.4
million.

Operating
Income.  We recorded operating loss of $39.9 million
in 2001 compared with an operating loss of $14.1 million during 2000.

Other
Income (Expenses), Net.  We recorded other income of
$4,000 in 2001, compared to other income of $9,000 in 2000.  The income in 2001 and 2000 is related to a
sale of fixed assets.

Financial
Income (Expenses), Net.  We recorded financial income,
net of financial expenses, of $875,000 in 2001, compared with $5.1 million in
2000.  The decrease in 2001 resulted
primarily from an other than temporary impairment of financial instruments of
approximately $1.8 million.

Net
loss before tax.  As a result of the foregoing, we recorded a
net loss before tax of $39 million in 2001, compared with a net loss before tax
of $8.96 million in 2000.

Provision
for tax. We were
audited by the tax authorities in Israel and as a result, we made provisions of
approximately $67,000.

Net
loss.  We recorded net loss of $39.1 million in
2001, compared with a net loss of $8.96 million in 2000.  As a percentage of revenues, net loss
increased to approximately 132.9 % in 2001 compared with approximately 29.2% in
2000.

43

---

---

Quarterly Results of Operations

The
following tables set forth Consolidated Statement of Operations Data for each
of the eight quarters ended December 31, 2002, both in dollar amounts and
as a percentage of our revenues for the respective quarters.  This information has been derived from our
unaudited consolidated financial statements. 
The unaudited consolidated financial statements have been prepared on
the same basis as the audited consolidated financial statements contained
elsewhere in this Annual Report and include all adjustments, consisting only of
normal recurring adjustments, that we consider necessary for a fair
presentation of the information.  The
information should be read in conjunction with our Consolidated Financial
Statements and the related Notes appearing elsewhere in this Annual Report.

|                                                                         |  | Fiscal 2001                 |   | Fiscal 2002      
|------------------------------------------------------------------------ |  | --------------------------- | - | -----------------
|                                                                         |  |                             |   |                  
|                                                                         |  | Mar. 31,
  2001             |   | June
  30,
  2001
|                                                                         |  |                             |   |                  
|                                                                         |  | (U.S. dollars in thousands)
|Consolidated Statement of    Operations Data:                            |  |                             |   |                  
|Revenues                                                                 |  | $  8,014                    |   |                  
|Cost of revenues                                                         |  | 3,877                       |   |                  
|Gross profit                                                             |  | 4,137                       |   |                  
|Operating expenses:                                                      |  |                             |   |                  
|Research and development, net                                            |  | 4,101                       |   |                  
|Selling and marketing, net                                               |  | 2,780                       |   |                  
|General and administrative                                               |  | 1,469                       |   |                  
|Impairment of acquired intangibles                                       |  |                             |   |                  
|Restructuring cost                                                       |  |                             |   |                  
|In process research and development
          write off                  |  |                             |   |                  
|Total operating
  expenses                                               |  | 8,350                       |   |                  
|Operating loss                                                           |  | (4,213                      | ) |                  
|Other income (expenses), net                                             |  |                             |   |                  
|Financial income (expenses), net                                         |  | 1,038                       |   |                  
|Net (loss) before tax                                                    |  | (3,175                      | ) |                  
|Provision for tax                                                        |  |                             |   |                  
|Loss after income tax                                                    |  | (3,175                      | ) |                  
|Equity in loss of
  affiliate                                            |  |                             |   |                  
|Net loss before cumulative
  effect of changes in accounting
  principle |  | (3,175                      | ) |                  
|Cumulative effect of changes in
  accounting principle                   |  |                             |   |                  
|Net loss                                                                 |  | (3,175                      | ) |                  
|                                                                         |  |                             |   |                  
|Percentage of Revenues:                                                  |  |                             |   |                  
|Revenues                                                                 |  | 100                         | % |                  
|Cost of revenues                                                         |  | 48.4                        |   |                  
|Gross margin                                                             |  | 51.6                        |   |                  
|Operating expenses:                                                      |  |                             |   |                  
|Research and development, net                                            |  | 51.2                        |   |                  
|Selling and marketing, net                                               |  | 34.7                        |   |                  
|General and administrative                                               |  | 18.3                        |   |                  
|Impairment of acquired intangibles                                       |  |                             |   |                  
|Restructuring cost                                                       |  |                             |   |                  

44

---

---

|                                                                           |  | Fiscal 2001                 |    | Fiscal 2002      
|-------------------------------------------------------------------------- |  | --------------------------- | -- | -----------------
|                                                                           |  |                             |    |                  
|                                                                           |  | Mar. 31,
  2001             |    | June
  30,
  2001
|                                                                           |  |                             |    |                  
|                                                                           |  | (U.S. dollars in thousands)
|                                                                           |  |                             |    |                  
|In process research and development
          write off                    |  |                             |    |                  
|Total operating
  expenses                                                 |  | 104.2                       |    |                  
|Operating (loss)                                                           |  | (52.57                      | )  |                  
|Other income, (expenses), net                                              |  |                             |    |                  
|Financial income (expenses), net                                           |  | 13                          |    |                  
|Net (loss) before tax                                                      |  | (39.6                       | )  |                  
|Provision for tax                                                          |  |                             |    |                  
|Loss after income tax                                                      |  | (39.6                       | )  |                  
|Equity in loss of
  affiliate                                              |  |                             |    |                  
|Net (loss) before cumulative
  effect of changes in accounting
  principle |  | (39.6                       | )  |                  
|Cumulative effect of changes in
  accounting principle                     |  |                             |    |                  
|Net income (loss)                                                          |  | (39.6                       | )% |                  
|                                                                           |  |                             |    |                  

In
September 2001, as part of our efforts to tighten cost controls and improve
financial performance, we underwent a restructuring process. The restructuring
costs, a total of approximately $2.1 million, were comprised mainly of expenses
related to the reduction in workforce and write-off of assets related to that
reduction. The decrease in operating expenses resulting from the restructuring
process is reflected in the quarterly results from the quarter ended December
31, 2001 onwards. In the fourth quarter of 2002, we decided to make an
additional reduction in research and development expenses. This reduction would
be reflected in our quarterly results from the first quarter of 2003 onwards.

Our
quarterly results of operations may fluctuate significantly due to several
factors, including, among other things, the following:

| |  | the size,
  timing and shipment of orders;                                                                                                     
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------
| |  | sales of
  products associated with large projects requiring customization;                                                                    
| |  | delay or
  cancellation of projects of our customers;                                                                                          
| |  | the timing
  of introductions of new products or product upgrades by us and our
  competitors and the rate of acceptance of those new products;
| |  | customer
  order deferrals in anticipation of new products or product upgrades;                                                                
| |  | the mix of
  product sales;                                                                                                                    
| |  | software and
  hardware development problems;                                                                                                  
| |  | product
  quality problems;                                                                                                                    
| |  | competitive
  pressures on product pricing, which can adversely affect gross profit;                                                           
| |  | the
  effective provision by us of customer support; and                                                                                       
| |  | efforts of
  third-party distributors and resellers.                                                                                           

Because a
large percentage of our operating expenses are fixed, variations in timing of
orders and recognition of revenue can cause significant variations in our
operating results from quarter to quarter. 
For the foregoing reasons, we believe that quarter to quarter
comparisons of our results of operations are not necessarily meaningful and
that our results of operations in any particular quarter should not be relied
upon as an indication of future performance.

45

---

---

| | Conditions in Israel
| | --------------------

We
are incorporated under the laws of the State of Israel, and our principal
offices and substantially all research and development and manufacturing
facilities are located in Israel. 
Accordingly, we are directly affected by political, economic and
military conditions in Israel.  Our
operations would be materially adversely affected if major hostilities
involving Israel will occur or if trade between Israel and its present trading
partners will be curtailed.

Political
Conditions.  Since the establishment of the State of
Israel in 1948, a number of armed conflicts have taken place between Israel and
its Arab neighbors and a state of hostility, varying from time to time in
intensity and degree, has led to security and economic problems for
Israel.  However, a peace agreement
between Israel and Egypt was signed in 1979, a peace agreement between Israel
and Jordan was signed in 1994 and, since 1993, several agreements between
Israel and Palestinian representatives have been signed. As of the date hereof,
Israel has not entered into any peace agreement with Syria or Lebanon.
Moreover, since September 2000, there has been a significant deterioration in
the relationship between Israel and the Palestinian Authority. Efforts to
resolve the conflict have failed to result in an agreeable solution. In
the last two years, hostilities between Israel and the Palestinian Authority
have substantially increased.  These
hostilities include terrorist acts in Israel and military operations in the
West Bank and Gaza.  We could be
adversely affected if these hostilities intensify or spread to additional areas
in Israel. Further deterioration of the
situation into a full scale armed conflict might require more widespread
military reserve service by some of our employees and officers, which may have
a material adverse effect on our business.

Certain
countries, companies and organizations continue to participate in a boycott of
Israeli firms.  We do not believe that
the boycott has had a material adverse effect on us, but restrictive laws,
policies or practices directed towards Israel or Israeli businesses may have an
adverse impact on the expansion of our business.

Generally,
all male adult citizens and permanent residents of Israel under the age of 51are obligated to perform up to 36 days, or
longer under certain circumstances, of military reserve duty annually.  Additionally, all such residents are subject
to being called to active duty at any time under emergency circumstances.  Currently, a majority of our officers and
employees are obligated to perform annual reserve duty.  While we have operated effectively under
these requirements since our inception, we cannot assess the full impact of
such requirements on our workforce or business if conditions should change, and
we cannot predict the effect of any expansion or reduction of such obligations
on us.

Economic
Conditions.  Israels economy has been subject to
numerous destabilizing factors, including a period of rampant inflation in the
early to mid-1980s, low foreign exchange reserves, fluctuations in world
commodity prices, military conflicts and civil unrest.  The Israeli government has, for these and
other reasons, intervened in various sectors of the economy, employing, among
other means, fiscal and monetary policies, import duties, foreign currency
restrictions and controls of wages, prices and foreign currency exchange rates.  In 1998, the Israeli currency control
regulations were liberalized significantly, as a result of which Israeli
residents generally may freely deal in foreign currency and non-residents of
Israel generally may freely purchase and sell Israeli currency and assets.  There are currently no Israeli currency
control restrictions on remittances of dividends on the ordinary shares or the
proceeds from the sale of the shares; however, legislation remains in effect
pursuant to which currency controls can be imposed by administrative action at
any time.  The Israeli government has
periodically changed its policies in all these areas.

Furthermore,
the Israeli economy is currently in recession. The rate of unemployment is
rising, consumer spending has decreased and many businesses are experiencing
financial difficulties. A continuing deterioration in the economic conditions
in Israel may adversely affect usage patterns of our services and the ability
of our customers to pay for our services, which would adversely affect our
financial condition and results of operations. If the economic deterioration in
Israel continues, it may also affect the ability of Israeli banks to provide us
with financing on reasonable terms and conditions, should we need it in the
future.

Currency
and Inflation

A
substantial majority of our sales and expenses are incurred or determined in
U.S. dollars or are dollar-linked.  The
currency of the primary economic environment in which we operate is, therefore,
the dollar, which is our functional reporting currency.  Nevertheless, because certain of our
expenses are incurred in NIS and are affected by changes in the Israeli CPI,
the dollar cost of our operations is influenced by the extent to which any
increase in the rate of inflation in Israel is not offset, or is offset on a
lagging basis, by the devaluation of the NIS in relation to the dollar.

46

---

---

As
of June 17, 2003, the inflation rate in Israel has increased at a rate of 0%
while the NIS had appreciated against the dollar by approximately 8.1%. The inflation rate in Israel was
approximately 0% in 2000, approximately 1.4% in 2001 and approximately 6.5% in
2002.  At the same time the devaluation
of the NIS against the dollar was approximately 9.3% in 2001 and approximately
7.3% in 2002.  In 2000, NIS had
appreciated against the dollar by approximately 2.7%.  As a result of this differential, we experienced an increase in
the dollar costs of operations in Israel in 2000, and a decrease in 2001 and
2002, all of which did not materially affect our results in such periods.  The fluctuations in the dollar costs of our
operations in Israel related primarily to the costs of salaries in Israel,
which are paid in NIS and constitute a significant portion of our
expenses.  We cannot assure you that we
will not be materially adversely affected in the future if inflation in Israel
exceeds the devaluation of NIS against the dollar or if the timing of such
devaluation lags behind increases in inflation in Israel.

| | 5.B Liquidity and capital resources.
| | ------------------------------------

We
have funded our operations primarily through private and public sales of our
equity securities, borrowings from banks, research and development grants from,
among others, the EU RTD and the OCS, marketing grants from the Marketing Fund
and through cash generated from our operations.  As of December 31, 2002, we had cash, cash equivalents and
short - term investments of $45.3 million.

Our
operating activities provided cash of $8.2 million in 2000 and $23.4 million in
2002 and used $21.2 million in 2001. 
Cash provided by operating activities in 2000 was primarily the result
of our net loss for the period, as adjusted for in-process research and
development write-off, depreciation and amortization, amortization of deferred
stock compensation, decrease in trade receivables and a significant increase in
trade payables, partially offset by an increase in inventories, other accounts
receivables and prepaid expenses. Cash used by operating activities in 2001 was
primarily the result of our net loss for the period, as adjusted for impairment
of other assets, depreciation and amortization, amortization of deferred stock
compensation, other than temporary decrease in value of marketable securities,
loss on trading marketable securities, a significant decrease in trade
receivables and other receivables, partially offset by an increase in
inventories, a significant increase in trading marketable securities, a
significant decrease in trade payables, accrued expenses and other liabilities
and deferred revenues.   Cash provided
by operating activities in 2002 was primarily the result of our net loss for
the period, as adjusted for trading of marketable securities, net, impairment
of other assets, depreciation and amortization, amortization of deferred stock
compensation, a significant decrease in trade receivables, decrease in
inventories, cumulative effect of changes in accounting principle, equity in
loss of affiliates, partially offset by gain on sale of available-for-sale marketable
securities, a decrease in trade payables, accrued expenses and other
liabilities.

Net
cash used in investing activities in each of 2000 and 2002 reflects primarily
the purchase of financial assets, fixed assets and primarily capital equipment.
Net cash provided by investing activities in 2001 reflects the maturity and
sale of marketable securities and short-term bank deposits, purchase of fixed
assets and capital equipment. In 2002, $64.9 million were used primarily for
the purchase of financial assets, $946,000 were used for an investment in a
company, partially offset by $43 millions of proceeds from sale of
available-for-sale marketable securities, and redemption of matured
available-for-sale marketable securities In 2001, $41.4 million were provided
from the maturity and sale of marketable securities and short-term bank
deposits, partially offset by investment of $17 millions in marketable
securities. In 2000, net cash was primarily used for the purchase of financial
assets and other assets in connection with the acquisition of Viewgraphics and
HiTV.

Net
cash provided by financing activities in 2002 reflects primarily the net
proceeds from the issuance of ordinary shares and exercise of stock options and
warrants approximately in the amount of $342,000, and $35,000, respectively,
partially offset by principal payments of long-term capital lease obligations
in the amount of approximately $197,000. 
Net cash used in financial activities in 2001 reflects primarily the
purchase of treasury shares, partially offset by proceeds from the issuance of
ordinary shares and exercise of stock options and warrants in the amount of
approximately $442,000 and $702,000, respectively. Net cash provided by
financing activities in 2000 reflects primarily the net proceeds from issuance
of ordinary shares approximately in the amount of $67 million and exercise of
stock options and warrants approximately in the amount of $668,000. During the
last quarter of 2000 and the first quarter of 2001, we repurchased some of our
own shares in the amount of  $65,000 and
1.1 million, respectively.

47

---

---

As
of December 31, 2002, both our short-term long-term indebtedness were
affected by obligations undertook during the acquisition of Viewgraphics.  As of December 31, 2002, we have an authorized unused line of credit in the
amount of $10.8 million of which $10 million are secured against financial
securities.  We have an agreement with
Clal Credit Insurance Ltd. for the provision of insurance against default on
outstanding receivable balances.

In the
second quarter of 2003, Optibase transferred approximately $39.3 million of its
monies and investments to Optibase, Inc. to achieve better net profit from the
investment. We manage our investment portfolio on a discretionary basis, within
the framework of an investment policy based upon an established set of
guidelines approved by our board of directors. The main terms of the investment
guidelines permit us to invest in the following securities: (i) U.S. Treasury
and Agency obligations; (ii) money market instruments of domestic and foreign
issues denominated in US dollars of commercial paper, bankers acceptances,
certificates of deposit, euro-dollar time deposits and variable rate issues;
(iii) corporate notes and bonds rated investment grade (BAA/BBB- and above),
provided that investments in any one corporation or entity will not exceed $3
million; (iv) Investments in bonds and notes with lower rating than BBB- and
higher rating than B, provided that investments in any one corporation or
entity will not exceed $1 million. (v) Widely held funds that invest in
corporate and sovereign debt.  The
investment guidelines are to be reviewed periodically by our board of directors
with the President and Chief Financial Officer.

As of the
date hereof, we do not have any material contractual commitments related to
capital expenditure.

We believe
that, considering the use of cash in our ongoing operations, together with the
existing sources of liquidity described above, our current cash, cash
equivalents and short term investments will be sufficient to meet our needs for
cash for at least the next 12 months. 
However, Our liquidity and capital requirements are affected by many
factors, some of which are based on the normal ongoing operations of our
businesses and some of which arise from uncertainties related to global
economies and the markets that we target for our services. In addition, we
routinely review potential acquisitions. 
If we grow more rapidly than currently anticipated, it is possible that
we would require more funds than anticipated. 
In that event, we would likely seek additional equity or debt financing,
although we cannot assure you that we would be successful in obtaining such
financing on favorable terms or at all.

| | 5.C Research and development, patents and licenses, etc.
| | --------------------------------------------------------

Research
and development expenses, net, consist primarily of labor expenses,
development-related raw materials, acquisition related costs and stock option
charges and related overhead, offset by grants.  Research and development expenses, net, decreased approximately 47.8% from $15.6 million in
2001 to $8.1 million in 2002, after increasing in 149% from $6.3 million in
2000 to $15.6 million in 2001.  As a
percentage of revenues, research and development expenses, net, decreased to approximately 39.8% in 2002 from approximately 52.9% in 2001 after
increasing to approximately 52.9% in 2001 from approximately 20.3% in
2000.  The dollar decrease in research
and development was primarily due to the decrease in the amortization of
tangible and intangible assets, a decrease in labor and subcontracting
costs.  Research and development grants
increased to $2.2 million in 2002 from $1.8 millions in 2001 and $1.4 million
in 2000.  We expect research and
development expenses to decrease in absolute dollars and as a percentage of
revenues during 2003 primarily as a result of the managements ongoing efforts to tighten cost controls and improve
financial performance while introducing additional products and
conducting ongoing improvements to our standard and custom products.

| | 5.D Trend information
| | ---------------------

The digital
media industry continues to be intensely competitive, and the industry is
continuing to undergo consolidation and contraction.  We will continue to focus on developing technologies and new
products, and research and development expenses might grow in the future
years.    We continue to aggressively
market our new products, while expanding markets for our existing
products.  However, as discussed
throughout this Annual Report, our operations have been subject, and will
continue to be subject, to pressure from weakness in the overall technology
sector as well as the digital media industry. 
We have been operating at a loss since the quarter ended December 31,
2000, and anticipate that we will continue to operate at loss in 2003, if the
market continues to be weak, our customers decrease their purchase orders or
our sales cycle will become longer due to the slowing economy. As announced on
June 20, 2002, as a result of the continued difficulties within the technology
sector in the beginning of 2002, we experienced a general reduction in orders,
including a significant order from one of our customers.  We, therefore, announced that we expect to
report lower than anticipated revenues for the second quarter of 2002. The loss
of the customer orders has resulted in reduced revenues throughout 2002 and may
result in reduced revenues in further quarters.

48

---

---

| | Item 6. Directors, Senior Management and Employees
| | --------------------------------------------------

| | 6.A Directors and senior management
| | -----------------------------------

The
following table sets forth information with respect to the individuals who are
currently our directors and executive officers.  All of these individuals are presently serving in the respective
capacities described below:

|Name                    |  | Age |  | Position                                                      
|----------------------- |  | --- |  | --------------------------------------------------------------
|                        |  |     |  |                                                               
|Tom Wyler(3)            |  | 51  |  | Chief Executive Officer and Chairman of the Board of Directors
|Zvi Halperin            |  | 48  |  | President and Chief Financial Officer                         
|Greg Eisips             |  | 36  |  | President of Optibase Inc.                                    
|Moshe Rousso            |  | 38  |  | General Manager, Broadband TV Business Unit                   
|Amir Goren              |  | 33  |  | Vice
  President of Marketing and Business Development        
|David Sackstein         |  | 37  |  | Executive Vice President R&D                                  
|Orna Gil-Bar            |  | 38  |  | Vice President of Human Resources                             
|Yaron Comarov           |  | 38  |  | Vice President of Operations                                  
|Rene Montsma            |  | 37  |  | Vice President of International Sales                         
|Adam Schadle            |  | 41  |  | Vice President of Sales North and South America               
|Blake Homan             |  | 40  |  | Vice President of Technical Marketing                         
|Danny Lustiger          |  | 36  |  | Vice President of Finance, Optibase Inc.                      
|Dana Tamir(2)           |  | 54  |  | Director                                                      
|Chaim Labenski(1)(2)(3) |  | 55  |  | Director                                                      
|Eddy Shalev(1)(2)       |  | 55  |  | Director                                                      
|Alex Hilman(2)          |  | 51  |  | Director                                                      

---

|(1) | Member of the compensation committee
|--- | ------------------------------------
|(2) | Member of the audit committee       
|(3) | Member of the investment committee  

Tom
Wyler has served
as Chairman of the Board of Directors of Optibase since September 2001, and in
February 2002, Mr. Wyler also assumed the role of Chief Executive Officer in
charge of our operations. In June
2003, Wyler was appointed by our board of directors as chief executive officer,
subject to the approval of this appointment by our shareholders, as required
under Israeli law. Through the Festin
Group, of which he is a co-owner, Mr. Wyler has had substantial stakes in
several public companies in Switzerland. His other areas of involvement include
investment banking, foreign exchange and financial futures. In the early 1990s,
Mr Wyler turned his efforts to real estate interests in the U. S. More recently,
his attention has been directed toward the high-tech industry in Israel. Mr.
Wyler holds a Masters degree in Business Economics from the University of
Zurich.

Zvi
Halperin has served as Vice President and Chief
Financial Officer of Optibase since March 1994 and President since January
2002. He also served as the acting Chief Executive Officer of Optibase between
September 2001 and January 2002. From 1984 until 1994, Mr. Halperin held the
position of Group Controller and Financial Manager at Oshap Technologies Ltd.,
an Israeli holding company traded on Nasdaq. He is a Certified Public
Accountant in Israel and holds a B.A. degree in Accounting and Economics from
the Tel Aviv University.

49

---

---



Greg
Eisips has served
as President of Optibase, Inc. since September 2001. Mr. Eisips has been with
Optibase, Inc. since 1998, when he joined Optibase, Inc. as Director of
Technical Marketing. Before assuming his current role of President in October
2001, Mr. Eisips was Vice President of Technology, managing the technical
marketing and technical services teams as well as strategic alliances with
customers and partners. Prior to joining Optibase, Inc., Mr. Eisips served as
Director, Technical Marketing for VDOnet corporation from 1996 to 1998, where
he focused on Internet streaming solutions for major media houses in the New
York area. Before joining VDOnet Mr. Eisips was Vice President R&D for VCON
Ltd., where he built the engineering team that successfully brought to market
innovative and cost-effective videoconferencing products. VCON Ltd. was a
spin-off of Optibase Ltd., where Mr. Eisips worked as project manager for
MPEG-1 and motion JPEG video codecs in the early 90s. Mr. Eisips holds cum laude
BsCE and MsEE degrees from the Technion Israel Institute of Technology.

Moshe
Rousso serves as
General Manager of Broadband TV Business Unit at Optibase. Mr. Rousso joined
Optibase in October 2000. Prior to his present position, Mr. Rousso was Vice
President R&D in Optibase. Before joining Optibase, Mr. Rousso held a
number of R&D management positions at ECI Telecom. Mr. Rousso holds a B.Sc
E.E. degree from the Tel Aviv University.

Amir
Goren has served
as Vice President Marketing and Business Development since September 2002. In
the two years prior to his present position, Mr. Goren led strategic planning
and business development in Optibase. Before joining Optibase, Mr. Goren was a
team leader at P.O.C, a strategic and marketing planning consulting firm, where
he led strategic planning and fund raising projects for technological companies
at various stages of development in the fields of communications,
biotechnology, electronic control, Internet and services. Mr. Goren holds an
MBA degree and B.Sc degree in Industrial Engineering from the Tel Aviv
University

David
Sackstein, Senior Vice President of R&D, joined us
in November 1994. Since joining the Company, Mr. Sackstein has held various
technical and managerial positions in the R&D department, including Vice
President Advanced Technologies. Prior to joining Optibase, Mr. Sackstein held
the position of Research Fellow at IBMs Research Center in Haifa. Mr.
Sackstein holds a B.Sc. in Electrical Engineering and a B.A. in Mathematics,
both from the Technion Israel Institute of Technology.

Orna
Gil-Bar, the Vice President of Human Resources, joined
us in September 2000. Prior to joining Optibase, Ms. Gil-Bar served as Human
Resource Manager for Computer Associates in Israel. During her tenure at
Computer Associates, Ms. Gil-Bar was involved with the human resource
implications resulting from CAs acquisition of Platinum Inc. From 1994 to
1996, Ms. Gil-Bar served as an organizational consultant for the Israeli
Defense Forces. Ms. Gil-Bar holds an MBA degree (Organizational Structure and
Consulting) from the Tel-Aviv University.

Yaron
Comarov, currently our Vice President of Operations,
has been with Optibase since 1993. 
Prior to his present position, Mr. Comarov was our Director of
Operations.  Before joining Optibase,
Mr. Comarov worked as an Operations and Project Manager at Israel Aircraft
Industries.  Mr. Comarov holds a B.Sc.
degree in information systems and industrial engineering from the Technion
Israel Institute of Technology.  He is
currently completing his MBA at Boston University in Tel Aviv.

Rene
Montsmajoined Optibase as Vice President
International  Sales in January, 2002.
Before joining Optibase, Mr. Montsma served as Vice President and General
Manager Europe at Commtouch Inc. from 1999. 
Prior to his appointments at Commtouch, Mr. Montsma spent five years at
British Telecom where he managed international sales, distribution, and
business development. Mr. Montsma holds an MBA degree from INSEAD,
Fontainebleau and a M.Sc. degree in Computer Sciences from Free University,
Amsterdam.

Adam
Schadle joined us at the time we acquired Viewgraphics
Inc. in December 2000. Serving as Vice President, Sales and Marketing at
Viewgraphics, Mr. Schadle managed the growth of the companys digital cable,
broadcast and postproduction products. Prior to joining Viewgraphics, Mr.
Schadle held management positions at Sony Electronics from 1986 to 1994.   Mr. Schadle holds a B.A in Radio,
television and film from the San Jose University.

Blake
Homanjoined Optibase with the acquisition of
Viewgraphics Inc. in December 2000. As the Director of Technical Marketing,
Blake managed technical support and marketing activities for the Companys
digital cable, broadcast and postproduction products. Prior to Viewgraphics,
Mr. Homan served as Technical Support manager at MaxStrat, Inc. (acquired by
Sun Microsystems, 1998) from 1990 to 1994. Mr. Homan holds an AA Degree in
computer science from the Wadena Technical Institute, Wadena, Minnesota.

50

---

---

Danny
Lustiger has served as
Finance Vice President of Optibase, Inc since July 2001. From 1996 to 2001, Mr.
Lustiger  held the position of Group
Controller and Financial Manager at Optibase Ltd. From 1993 to 1996 Mr.
Lustiger held the position of an accountant and auditor at Igal Brightman and
Co., a member of Deloitte & Touche Tomatsu International.  Mr. Lustiger is a Certified Public
Accountant in Israel. Mr. Lustiger holds a B.A. degree in Accounting and
Economics and an MBA in Finance and International management from the Tel-Aviv
University.

Dana
Tamirjoined our
board of directors in September 2000. In the past, Ms. Tamir served as vice
president, marketing of Radguard Ltd., which specialized in VPW solutions for
service providers and large enterprises. From January 1997 to May 2000, Ms.
Tamir served as the Chief Executive Officer of Qronus Interactive Ltd. and as
president of Qronus, Inc., a company that was spun off by Mercury.

Chaim
Labenski joined
our board of directors in January 2002. From 1977 to 1999, Mr. Labenski held a
number of positions at Bank Hapoalim, including consulting, trade, research and
I.P.O coordination with global investment houses. Mr. Labenski holds a B.Sc
degree in Civil Engineering from Astor University, U.K, a M.Sc degree in
Engineering Management from Leeds University and a. B.A degree in Business
Administration from Manchester Business School.

Eddy
Shalevjoined our
board of directors in January 2002. Mr. Shalev is the Managing General Partner
of Genesis Partners, a leading Israeli Venture Capital Fund. Mr. Shalev has
participated in many private equity investments in emerging growth and
technology companies. He was an investor in many of the most successful
technology companies in Israel. From 1972 to 1983, Mr. Shalev held various
executive positions with IBM. Prior to joining IBM, Mr. Shalev worked in the
Computer Center of the Israeli Ministry of Defense. Mr. Shalev holds a M.Sc.
degree in Information System and a B.A. degree in Statistics from the Tel-Aviv
University.

Alex
Hilman joined our
board of directors in February 2002. Mr. Hilman is a partner in Hilman &
Co., which provides tax and business consulting services to corporations. Mr.
Hilman serves on the boards of various companies. Mr. Hilman has published
professional works on tax and accounting, among them, The Israel Tax Guide,
and in the past was an editor at Globes, a leading Israeli financial daily
paper. Mr. Hilman has also held professional and management positions at the
Ministry of Finance. Mr. Hilman holds a B.A. degree in Accountancy and
Economics from the Tel-Aviv University.

6.B
Compensation.

The
aggregate remuneration we paid to all persons as a group (16 persons) who
served in the capacity of director or executive officer in the year ended
December 31, 2002 was $1.55 million, including amounts paid to provide pension, retirement or
similar benefits pursuant to standard Israeli plans but excluding amounts
expended by us for automobiles made available to all of our officers, expenses
reimbursed to officers and other fringe benefits commonly reimbursed or paid by
companies in Israel.  In 2002, we set
aside $106,000 for the pension and severance fund benefits of our officers and
directors.  As of December 31,
2002, our current directors and executive officers (16 persons) held 3,137,212
shares, and share options to purchase an aggregate of 1,062,334 ordinary
shares.

Indemnification
of Directors and Officers.  The Israeli Companies Law permits a company to insure its
directors and officers, provides them with indemnification, either in advance
or retroactively, and exempt its directors and officers from liability resulting
from their breach of their duty of care towards the company, all in accordance
with the terms and conditions specified under Israeli law. Our articles of
association adopted clauses with respect to insurance, indemnification and
exemption of directors and officers of the Company in accordance with the terms
and conditions set forth by the Companies Law, as described hereunder.

Our
articles of association provide that, subject to statutory provisions, we may
enter into a contract for the insurance of the liability of its directors and
officers for an obligation imposed on a director and/or officer in consequence
of an act done in his or her capacity as a director and/or an officer, in any
of the following cases:

51

---

---



| |  | a breach of
  the duty of care vis-a-vis the Company or vis-a-vis another person;                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a breach of
  the fiduciary duty vis-a-vis the Company, provided that the officer acted in
  good faith and had a reasonable basis to believe that the act would not harm
  the Company; or
| |  | a monetary
  obligation imposed on the officer in favor of another person.                                                                                                                 

In
addition, our articles of association provide that we may give an advance
undertaking to indemnify a director and/or an officer, provided that the
undertaking is limited to types of events which in our board of directors
opinion are foreseeable at the time of giving the indemnity undertaking and in
such amount as the board of directors prescribes is reasonable in the
circumstances of the case.

Our
articles of association also provide that we can indemnify a director and/or an
officer for an obligation or expense imposed on him or her in consequence of an
act done in his or her capacity as an officer in the following events:

| |  | a monitory
  obligation imposed on the director and/or officer in favor of another person
  pursuant to a judgment, including a judgment given in a settlement or a court
  approved arbitrators award; and                                                                                                                                                                                                                                                                                                        
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | reasonable
  litigation costs, including advocates professional fees incurred by a
  director and/or officer or which he or she is ordered to pay by a court, in
  proceedings filed against the director and/or officer by the Company or on
  the Companys behalf or by another person, or in a criminal charge of which
  the director and/or officer is acquitted, or in a criminal charge of which
  the director and/or officer is convicted of an offence that does not require
  proof of criminal intent.

In addition,
our articles of association provide that we may exempt a director and/or an
officer in advance and retroactively for all or any of the directors and/or
officers liabilities for damages in consequence of a breach of the duty of
care vis-a-vis the Company.

Our
articles of association assert that we may not give insurance, indemnification
(including advance indemnification) nor may we exempt our directors and/or
officers from their liability in the following events:

| |  | a breach of
  the fiduciary duty vis-a-vis the Company, unless the officer acted in good
  faith and had a reasonable basis to believe that the act would not harm the
  Company;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | an
  intentional or reckless breach of the duty of care;                                                                                                                         
| |  | an act done
  with the intention of unduly deriving a personal profit; or                                                                                                        
| |  | a fine
  imposed on the officer.                                                                                                                                                 

Our
articles of association also provide, that the provisions pertaining to
insurance, exemption and indemnification of our directors and/or officers,
shall not limit us in entering into insurance contracts, if the insurance or
exemption or indemnification, is not expressly prohibited by any law.

We have a
directors and officers liability insurance policy. Our shareholders approved
indemnification of our directors and officers in connection with our public
offerings. We have undertaken to indemnify our directors and officers to the
fullest extent permitted by the Companies Law and our Articles of Association
and entered into an indemnity letter with each of our directors and executive
officers. The aggregate indemnification amount shall not exceed the higher of:
(i) 25% of our shareholders equity, as set forth in our financial statements
prior to such payment; (ii) $7.5 million. Optibase, Inc. has also undertaken to
indemnify its directors and officers to the maximum extent and in a manner
permitted by the California Corporation Code and entered into an indemnity
letter with each of its directors and officers, subject to similar limitations.
The aggregate indemnification amount shall not exceed the higher of: (i) 25% of
the shareholders equity of Optibase, Inc., as set forth in Optibase, Inc.s financial
statements prior to such payment; (ii) $7.5 million.

| | 6.C Board of Directors and Committees
| | -------------------------------------

Pursuant
to our articles of association, our board of directors is required to consist
of three to nine members. Directors are elected at the annual general meeting
of our shareholders by a vote of the holders of a majority of the voting power
represented at such meeting.  Each
director holds office until the annual general meeting of shareholders following
the annual general meeting at which the director was elected or until his
earlier resignation or removal. A director may be re-elected for subsequent
terms.   At present, our board of
directors consists of five members, including two external directors appointed
in accordance with the Israeli law requirements, as detailed herein. Our
articles of association provide that our directors may at any time and from
time to time, appoint any other person as a director, either to fill in a
vacancy or to increase the number of members of our board of directors.

52

---

---

Under
Israeli law, we are required to appoint two independent directors as members of
our board of directors, who meet the requirements set out in the Companies Law
for external directors. External directors are elected by a special majority as determined by the Companies Law, and
serve for a three-year term. External directors may be re-elected for one
additional three-years term only. External directors may not be dismissed
during their term of service, unless one of the events specified in the
Companies Law occurs. Mr. Eddy Shalev and Mr. Chaim Labenski were elected by
our shareholders in the general meeting as of January 31, 2002 to serve as
external directors.

Our
four directors who sit on our audit committee all qualify as independent
directors according to the Nasdaq requirements.

Our board
of directors has established an audit committee, a compensation committee, and
an investment committee, as described below.

Audit
Committee. The audit committee reviews our internal
accounting procedures and consults with and reviews the services provided by
our independent auditors.  In addition,
the Audit Committee serves as a review committee under Israeli law provisions
and recommends approval of transactions that are deemed interested party
transactions, including directors compensation.

Pursuant to
the listing requirements of the Nasdaq National Market, Optibase is required to
have at least two independent directors on its board of directors and to
establish an audit committee, at least a majority of whose members are
independent of management.  Messrs.
Shalev, Labenski and Hilman and Ms. Tamir, who we believe are independent of
management, currently serve on the audit committee of Optibases Board.

Pursuant to
the Sarbanes-Oxley Act of 2002, the SEC has issued new rules, which would,
among other things, require Nasdaq to impose independence requirements on each
member of the audit committee. Nasdaq has proposed rules that would comply with
the SECs requirements and which are expected to be applicable to us in 2004.

The
proposed requirements would implement two basic criteria for determining
independence: (i) audit committee members would be barred from accepting any
consulting, advisory or other compensatory fee from the issuer or an affiliate
of the issuer, other than in the members capacity as a member of the board of
directors and any board committee, and (ii) audit committee members of an
issuer that is not an investment company may not be an affiliated person of
the issuer or any subsidiary of the issuer apart from his or her capacity as a
member of the board and any board committee.

The SEC has
proposed to define affiliate for non-investment companies as a person that
directly, or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, the person specified. The term
control is proposed to be consistent with the other definitions of this term
under the Securities Exchange Act of 1934, as the possession, direct or
indirect, of the power to direct or cause the direction of the management and
policies of a person, whether through the ownership of voting securities, by
contract, or otherwise. A safe harbor has been proposed by the SEC, under
which a person who is not an executive officer, director or 10% shareholder of
the issuer would be deemed not to have control of the issuer.

Under the
final rules adopted by the SEC, an issuer is required to disclose in its annual
report, beginning with the annual report for 2003, whether or not such issuer
has at least one audit committee financial expert.  If it does, the issuer must disclose the name of the expert.  If not, the issuer must disclose why it does
not have an audit committee financial expert.

Optibase
believes that the current composition of the audit committee satisfies the
requirements of the SECs rules and the proposed Nasdaq rules.

53

---

---

Compensation
Committee. The compensation committee, which is comprised of
Eddy Shalev and Chaim Labenski, reviews and recommends to the board of
directors and in certain cases, determines, the compensation and benefits of
our employees and reviews general policy relating to our compensation and
benefits.  The compensation committee
also administers our share option plans.

Investment
Committee. Our investment committee, which is
comprised of Chaim Labenski and Tom Wyler manages our investments in accordance
with guidelines set by the board of directors.

The
Israeli Companies Law requires the board of a public company to appoint an
internal auditor pursuant to the audit committees proposal. The internal
auditor must satisfy certain independence requirements as required by the law.
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
procedures. Mr. Eyal Weitzman, CPA, has been appointed as our internal auditor.

| | Employment Agreements
| | ---------------------

Each
of our executive officers entered into a written employment agreement with us
that provides, among other things, that such officers be paid a monthly salary.  Each such agreement can be terminated either
by us or the employee upon prior notice, which ranges between 60 to 120 days
for most of the management team.  In the
event of a change of control, termination of employment may result in
acceleration of the vesting of options by additional 12 to 24 months. Vesting
of options granted prior to August 2001 to most of our extended management team
were fully accelerated. The employment agreements also provide that each
executive officer will maintain confidentiality of matters relating to us and
will not compete with us during the period of the officers employment and for
a certain period thereafter.

| | 6.D Employees
| | -------------

As
of June 2003, we had, including all of our subsidiaries and offices, 164
employees compared to 169 employees in December 2002, 172 employees in December
2001, and 206 employees in December 2000. We currently employ 15 part-time
employees, and the rest of the 149 employees are divided between the following
divisions: R&D  48 employees in Optibase Ltd. and 4 employees in Optibase,
Inc.; Sales: 5 employees in Optibase Ltd. and 11 employees in Optibase, Inc.; 2
in Europe and 7 in Asia. Marketing and Tech Marketing: 17 employees in Optibase
Ltd. and  9 employees in Optibase, Inc.,
Operations: 24 employees in Optibase Ltd. and 3 employees in Optibase, Inc.,
and G&A, Finance and HR: 13 employees in Optibase Ltd and 6 employees in
Optibase Inc. None of our employees or our
subsidiaries employees is a union member, and we believe that our employer -
employee relations are good.

Certain provisions of Israeli law and of the collective bargaining agreements
between the Histadrut (General Federation of Labor in Israel) and the
Coordination Bureau of Economic Organizations (the Israeli federation of
employers organizations) apply to our Israeli employees directly or by an
extension order of the Israeli Ministry of Labor and Welfare.  These provisions principally concern the
maximum length of the work day and the work week, minimum wages, recuperation
payments, travel expenses, determination of severance payment and other
conditions of employment.  Furthermore,
under these provisions, the wages of most of our employees are automatically
adjusted in accordance with the cost of living adjustments, as determined on a
nationwide basis and pursuant to agreements with the Histadrut based on changes
in the Israeli CPI, which was extended by an extension order.  The amounts and frequency of such
adjustments are modified from time to time.

Israeli
law generally requires the payment by Israeli employers of severance payment
upon the retirement or death of an employee or upon termination of employment
by the employer or, in certain circumstances, by the employee.  We currently fund our ongoing severance
obligations by making monthly payments for insurance policies.  In addition, according to the Israeli
National Insurance Law, Israeli employees and employers are required to pay
specified amounts to the National Insurance Institute, which is similar to the
United States Social Security Administration. 
These contributions entitle the employees to benefits in periods of
unemployment, work injury, maternity leave, disability, reserve military
service and bankruptcy or winding-up of the employer.  Since January 1, 1995, such amounts also include payments
for national health insurance payable by employees.  The payments to the National Insurance Institute are determined
progressively in accordance with wages. 
They currently range from 10.4% to 16.3% of wages, of which the
employees contribution ranges from 43% to 64% and the employers contribution
ranges from 57% to 36%.  A majority of
our full-time employees are covered by general and/or individual life and
pension insurance policies providing customary benefits to employees, including
retirement and severance benefits.

54

---

---

Recently
the Israeli employment courts have restricted substantially non-competition
provisions in employment agreements.

| | 6.E Share ownership
| | -------------------

As
of June 15, 2003, our current directors and executive officers (16 persons)
held an aggregate of 3,150,893 ordinary shares of our Company and options to
purchase an aggregate of 1,323,834 ordinary shares, of which options to
purchase 681,327 shares are vested and exercisable within 60 days.    We
have also issued warrants to purchase an aggregate of 125,725 ordinary shares
at an exercise price of $0.33 per share, out of which 41,908 were exercised and
warrants exercisable for 83,817 ordinary shares are still outstanding as of
June 15, 2003.

Option plans

Since
1990, we have granted options to key employees and directors to purchase
ordinary shares at exercise prices ranging from $0.17 to $32.  As of June 15, 2003, options and warrants to
purchase 3,340,796 of our ordinary shares were outstanding, with exercise
prices ranging from $0.17 to $32 per share. 
Of these outstanding options, 318,226 ordinary shares are subject to
options under our 1994 Option Plan, 83,817 are warrants excisable for ordinary
shares, 2,357,561 shares are subject to options under our 1999 Israeli Option
Plan, the 1999 U.S. Option Plan and the 102 Plan, and 581,192 shares are
subject to options under the 2001 Non-statutory Share Option Plan.  As of the date hereof, 1,980,757 of the
options described above have vested. The expiration dates of the aforementioned
options range from 2003 to 2010.

1999
Israeli and U.S. Option Plans; 102 Plan.  In
January 1999, our shareholders approved the adoption of an Israeli option plan,
or the 1999 Israeli Option Plan, and a U.S. option plan, or the 1999 U.S.
Option Plan.  In November 1999, our
board of directors adopted an additional option plan entitling the grantees to
tax benefits under section 102 of the Israeli Income Tax Ordinance, or the 102
Plan.  The purposes of the 1999 Israeli
Option Plan, the 1999 U.S. Option Plan and the 102 Plan, or the Plans, are to
attract and retain the best available personnel, to provide additional
incentive to employees, directors and consultants and to promote the success of
our business. In December 1999, our board of directors adopted a resolution to
amend the Plans in a manner that as of April 1, 2000, the number of shares
made available for grant under the Plans will be automatically increased
annually, to equal 5% of our outstanding share capital at the relevant time.  As of June 15, 2003, an aggregate of
4,126,642 ordinary shares have been reserved for issuance under the Plans.  We 
granted in May 2003 600,000 options for employees and officers of the
Company under the 102 Plan in accordance with the capital gains track.

Unless
specifically changed for a certain grantee, options vest over a period of four
years, starting one year after the grant of options, subject to the continued
employment of the grantee.  The exercise
price of the options is determined by our board of directors, subject to
limitations.  Generally, options granted
under each of the Plans will have a term of no more than ten years from the
date of grant.   All options are subject
to earlier termination upon termination of the grantees employment or other
relationship with us, generally no less than 30 days from termination.  We may make, from time to time, certain
exceptions in the vesting and expiration terms of options granted to certain
grantees.

Options
issued in connection with the Acquisition of Viewgraphics.In
connection with the acquisition of Viewgraphics in December 2000, we assumed
all options to acquire Viewgraphics common stock outstanding prior to the
acquisition and issued in an aggregate options to acquire 753,384 ordinary shares at exercise prices
ranging from $0.17 to $12.03. As of June 15, 2003, 78,766 options are still
outstanding.

2001
Non-statutory Share Option Plans.  In
April 2001, our board of directors approved the adoption of the 2001
Non-statutory Share Option Plan, the purposes of which are to attract and
retain the best available personnel, to provide additional incentive to
employees, directors and consultants and to promote the success of our
business.  The options to be granted
under the plan are limited to non-statutory options, thus there will be no
incentive stock options.  In addition,
we plan to use this plan to grant options to employees only, thus excluding
officers and directors from the plan. 
As such, we do not need shareholder approval of this plan under U.S.
laws or applicable Nasdaq rules.  An
aggregate of 670,000 ordinary shares has been reserved for issuance under this
plan, and 581,192 of them were granted and are outstanding as of June 15,
2003.  The plan otherwise has terms similar
to those contained under the 1999 U.S. Option Plan.

55

---

---

Termination
of the 2000 Employee Share Purchase Plan.In November 2002, we terminated the 2000 Employee
Share Purchase Plan. We have issued an aggregate number of 341,603 shares under
the 2000 Employee Share Purchase Plan at purchase prices per share ranging
between $11.1 and $1.39. Since the termination of the 2000 Employee Share
Purchase Plan in November 2002, we do not have any continuing obligation to
issue shares under the 2000 Employee Share Purchase Plan.

|Item 7 Major
  Shareholders and Related Party Transactions
|----------------------------------------------------------
|                                                          
|                                                          

The
following table sets forth certain information regarding the beneficial
ownership of the ordinary shares at June
15, 2003 of (i) each person or group known by us to own beneficially 5%
or more of the outstanding ordinary shares and (ii) the beneficial ownership of
all officers and directors as a group, in each case as reported to by such
persons.

|Name of Beneficial Owner                                             |  | Class of
  Security |  | No. Of Shares
  Beneficially Held (1) |  | % of Class
|-------------------------------------------------------------------- |  | ------------------- |  | ------------------------------------- |  | ----------
|                                                                     |  |                     |  |                                       |  |           
|Festin
  Management Corp.                                            |  | Ordinary shares     |  | 3,100,000 (2)                         |  | 25.06     
|Avraham and
  Moshe Namdar(4)                                        |  | Ordinary shares     |  | 2,159,300(5)                          |  | 17.45     
|Shareholding
  of all directors and officers as a group (16 persons) |  | Ordinary shares     |  | 3,832,220 (3)                         |  | 29.36     

---

|1. | Number of shares and
  percentage ownership is based on 12, 371,206 ordinary shares outstanding as of June 15, 2003. Such number excludes 531,023
  shares held by the Company, which have no rights in equity and no voting
  rights.  Beneficial ownership
  is determined in accordance with rules of the SEC and includes voting and
  investment power with respect to such shares.  Shares subject to options that are currently exercisable or
  exercisable within 60 days of June 15,
  2003 are deemed to be outstanding and to be beneficially owned by the
  person holding such options for the purpose of computing the percentage
  ownership of such person, but are not deemed to be outstanding and to be
  beneficially owned for the purpose of computing the percentage ownership of
  any other person.  All information
  with respect to the beneficial ownership of any principal shareholder has
  been furnished by such shareholder and, unless otherwise indicated below, we
  believe that persons named in the table have sole voting and sole investment
  power with respect to all the shares shown as beneficially owned, subject to
  community property laws, where applicable. 
  The shares beneficially owned by the directors include the ordinary
  shares owned by their family members to which such directors disclaim
  beneficial ownership.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|2. | The principal place of
  business is Road Town, Pasea Estate, P.O. Box 3149, Tortola, British Virgin
  Islands.  Festin Management Corp. was
  formed by Mr. Tom Wyler and Mr. Arthur Mayer-Sommer, each owning 50% of the
  capital stock of Festin. Each is principally engaged as a private investor.
  In June 2001, our board of directors appointed Wyler and Mayer-Sommer to
  serve as directors and in September 2001, the board of directors appointed
  Wyler to serve as the chairman of our board of directors. In October 2002,.
  Mayer-Sommer resigned from his service as a director of the Company. Wyler
  has also assumed the position of Chief Executive Officer in charge of our
  operations And in June 2003, Wyler was appointed by our board of directors as
  chief executive officer, subject to the approval of this appointment by our
  shareholders, as required under Israeli law. Under Israeli law, a purchase
  that increases the holding of a person to 25% or more of the voting rights in
  a company  (in the event there is no
  other holder of 25% or more of such companys voting rights) is prohibited
  without the performance of a special tender offer (see Item 3.D(c)  risks
  relating to our business anti take-over provisions could negatively impact
  our shareholders above). Since Festin Management Corp.s voting rights in us
  increased above 25% as a result of our purchase of our shares, see section 1
  above, under Israeli law, the number of our shares which results in Festin
  Management Corp. holding 25% or more of the voting rights in the Company do
  not have any voting rights for as long as such shares are held by Festin
  Management Corp. Accordingly, Festin Management Corp. does not have any
  voting rights with respect to 9,599 shares. 
  In December 2002, our shareholders approved a grant of 200,000 options
  exercisable into 200,000 of our shares to Wyler, subject to certain
  adjustments. None of the aforementioned options is vested as of June 15, 2003
  or for a period of 60 days thereafter.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|3. | Includes 3,150,893 ordinary
  shares and 681,327 shares issuable upon exercise of options that may be
  exercisable within 60 days of the date hereof.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|4. | Avraham and Moshe Namdar
  are brothers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|5. | Includes 1,265,000 shares
  held by Moshe Namdar, and 894,300 shares held by Avraham Namdar.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

56

---

---

Significant
changes in the ownership of our shares.

The
following table specifies significant changes in the ownership of our shares by
Festin Management Corp. This information is based on the forms 13D filed by
Festin Management Corp beginning March 3, 2001, regarding ownership of our
shares:

|Beneficial Owner  
  Festin Management Corp | Date           | No. Of Shares Beneficially Held
|-------------------------------------------- | -------------- | -------------------------------
|                                             | March 3 2001   | 1,599,100                      
|                                             | April 24, 2001 | 1,981,900                      
|                                             | May 17, 2001   | 2,325,400                      
|                                             | June 19, 2001  | 2,588,800                      
|                                             | July 15, 2001  | 3,100,000                      

The
following table specifies significant changes in the ownership of our shares by
Avraham and Moshe Namdar.   This
information is based on the forms 13D filed by Avraham and Moshe Namdar
beginning July 24, 2002, regarding ownership of our shares:

|Beneficial Owner  
  Avraham and Moshe
  Namdar | Date              | No. Of Shares Beneficially Held
|------------------------------------------------ | ----------------- | -------------------------------
|                                                 | July  24, 2002    | 1,338,800                      
|                                                 | August 1, 2002    | 1,474,300                      
|                                                 | October3, 2002    | 1,684,300                      
|                                                 | November 25, 2002 | 1,834,300                      
|                                                 | December 30, 2002 | 1,964,300                      
|                                                 | February 27, 2003 | 2,159,300                      

On
June 20, 2003, there were approximately 86 shareholders of record of our
ordinary shares.  As of such date, 65
record holders in the United States hold approximately 95.702% of our ordinary
shares.

To the best
of our knowledge, except as described above, we are not owned or controlled
directly or indirectly by any government or by any other corporation.  We are not aware of any arrangement, the
operation of which may at a subsequent date result in a change in control of
the company.

57

---

---

| | 7.B Related Party Transactions
| | ------------------------------

On
August 13, 2001, Mr. Ran Eisenberg, our former chief executive officer,
tendered his resignation. On August 30, 2001, an agreement was signed between
Mr. Eisenberg and us, according to which Mr. Eisenberg shall serve as an
advisor to our board of directors from April 28, 2002 until the earlier of  (1) termination of the agreement by the
Company as a result of (i) a material breach of the agreement; (ii) willful
misconduct or acts in bad faith; or (iii) committal of a felony or a common law
fraud, against us; performed by Mr. Eisenberg; or (2) on August 30, 2002. In
consideration for his services, Mr. Eisenberg received $170,000 plus VAT, of
which 50% was paid on September 30, 2001 and the rest was paid in 2002. Mr.
Eisenberg was also reimbursed for reasonable business expenses incurred in
connection with the services and approved in advance by us.

In
connection with the separation of Mr. John Krooss employment with us effective
September 2001, we entered into a Separation Agreement and General Release
dated January 15, 2002, pursuant to which Mr. Krooss continues to serve on our
board of directors, and will, at his election and expense, receive certain
health insurance benefits. The Employment Agreement with Mr. Krooss dated
November 30, 2000 was terminated.  We
also agreed to indemnify Mr. Krooss in his capacity as a member of the board of
directors or officer for all periods commencing on or after December 4, 2000
and to recommend to the our board of directors that Mr. Krooss be granted
additional options in an amount determined by the board of directors.  In addition, we agreed to release certain of
Mr. Krooss shares in escrow in connection with a settlement between the
Company and the former shareholders of Viewgraphics (for details see Item 10.C
 Material Contracts below). In July 2002 Mr. Krooss resigned from his position
as a director of the Company.

See also
the discussion regarding our relationships with Mobixell and V.Box under Item
4.ACompany Overview.

| | Loans to
  employees
| | --------------------

In
February 2001, we lent to Hillel Gazit an amount of $100,000, which bears
interest at a rate of 6% per annum and is payable in full in February 2003. In connection with the release of
shares in escrow to the former shareholders of Viewgraphics in January 2001, we
received 8,878 shares otherwise releasable to Hillel Gazit as security under the
loan agreement with Hillel Gazit. In February 2003, Mr. Gazit paid the
accumulated interest on the loan. The parties are now discussing the repayment
of the loan principal itself.  We have
made full provisions for the loan in the financial report for the year 2002 in
the event the principal of the loan is not repaid.

Furthermore,
from time to time we lend unsubstantial amounts to our employees, which are not
deemed benefits by Israeli tax authorities.

| | 7.C Interests of experts and counsel
| | ------------------------------------

Not
applicable.

|Item 8.
  Financial Information
|-------------------------------
|                               
|                               

The
following financial statements of the Company and the auditors report
appearing on pages F-1 through F-42 of this Annual Report for fiscal 2002 are
incorporated herein by reference:

| |  | Independent
  auditors report.                                                           
| | - | ------------------------------------------------------------------------------------------
| |  | Balance
  Sheets as of December 31, 2002 and 2001.                                        
| |  | Statements
  of Income for the years ended December 31, 2002, 2001 and 2000.              
| |  | Statements
  of Shareholders Equity for the years ended December 31, 2002, 2001 and 2000.
| |  | Statements
  of Cash Flows for the years ended December 31, 2002, 2001 and 2000.          
| |  | Notes to
  financial statements.                                                          

58

---

---



Legal proceedings

We have
initiated legal proceedings against Merrill Lynch and its asset management unit
with respect to losses estimated at $2 million that were incurred on an
investment account managed by Merrill Lynch and its Asset Management Unit.
These losses were recognized in our year-end results for 2001. The arbitration
claim with the New York Stock Exchange was filed in February 2002. We expect
the arbitration process to begin in July 2003. There are several legal
proceedings initiated against us in the ordinary course of business, and we do
not believe that the outcome of these proceedings, if adverse to us,
individually or in the aggregate, will have a significant effect on our
financial position or profitability.

Dividends

We have not
declared or paid any cash dividends on our ordinary shares in the past.  We do not expect to pay cash dividends on
our ordinary shares in the foreseeable future and intend to retain our future
earnings, if any, to finance the development of our business.

Our future
dividend policy will be determined by our board of directors and will depend,
among other factors, upon our earnings, financial condition, capital
requirements, the impact of the distribution of dividends on our financial
condition and tax liabilities, and such other conditions as our board of
directors may deem relevant.  Under
Israeli law, an Israeli company may pay dividends only out of its retained
earnings as determined for statutory purposes. Under our articles of
association the distribution of dividends will be made by a resolution of the
Companys board of directors.  The board
of directors may also distribute interim dividends on account of the final
dividend.  See Description of Share
Capital and Israeli Taxation and Investment Programs.

Cash
dividends paid by an Israeli company are normally subject to a withholding tax,
except for dividends paid to an Israeli company in which case no tax is
withheld unless the dividend is in respect of earnings from an Approved
Enterprise.  In addition, because we
have received certain benefits under Israeli laws relating to Approved
Enterprises, the payment of dividends by us may be subject to certain Israeli
taxes to which we would not otherwise be subject.  The tax-exempt income attributable to the Approved Enterprise can
be distributed to shareholders without subjecting us to taxes only upon our
complete liquidation.  If we decide to
distribute a cash dividend out of income that has been exempted from tax, the
income out of which the dividend is distributed will be subject to corporate
tax at a rate between 10% and 25%.  See
Israeli Taxation and Investment Programs.

In the
event that cash dividends are declared in the future, such dividends will be
paid in NIS or in foreign currency subject to any statutory limitations.  Under current Israeli regulations, any
dividends or other distributions paid in respect of ordinary shares will be
freely repatriable in such 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. 
Because exchange rates between the NIS and the dollar fluctuate
continuously, a United States shareholder will bear the risks of currency
fluctuations during the period between the date such dividend is declared and
paid by us in NIS and the date conversion is made by such shareholder into U.S.
dollars.

8.B
Significant Changes

Except for
as stated in this annual report, there are no significant financial changes as
of December 31, 2002.

Item 9. The Offer and Listing

9.A.4
and 9.C: Price History and Market

Our
ordinary shares are traded on the Nasdaq National Market under the symbol OBAS
since our initial public offering on April 7, 1999.  The following table sets forth, for the
periods indicated, the high and low close sale prices per share of our ordinary
shares as reported by the Nasdaq National Market.

59

---

---

|                              |  | High |        | Low |  
|----------------------------- |  | ---- | ------ | --- | -
|                              |  |      |        |     |  
|1999 (as of April 7, 1999)    |  | $    | 35.25  |     | $
|2000                          |  | $    | 41.875 |     | $
|2001                          |  |      |        |     |  
|First Quarter                 |  | $    | 9.25   |     | $
|Second Quarter                |  | $    | 6.55   |     | $
|Third Quarter                 |  | $    | 5.7    |     | $
|Fourth Quarter                |  | $    | 3.16   |     | $
|2002                          |  |      |        |     |  
|First Quarter                 |  | $    | 3.288  |     | $
|Second Quarter                |  | $    | 3.00   |     | $
|Third Quarter                 |  | $    | 2.14   |     | $
|Fourth Quarter                |  | $    | 2.38   |     | $
|2003                          |  |      |        |     |  
|January                       |  | $    | 2.04   |     | $
|February                      |  | $    | 1.92   |     | $
|March                         |  | $    | 2.12   |     | $
|April                         |  | $    | 2.18   |     | $
|May                           |  | $    | 3.04   |     | $
|June  (through June 25, 2003) |  | $    | 3.36   |     | $

On
June 25, 2003, the reported closing sale price of our ordinary shares on the
Nasdaq National Market was $3.36 per share.

Item 10. Additional Information

10.A
Share capital

Not
applicable.

10.B
Articles of Incorporation

Purposes and
Objects of the Company

We are a
public company registered under the Israeli Companies Law as Optibase Ltd.,
registration number 520037078.

Pursuant to
our articles of association, our objectives are to engage in any lawful
business and our purpose is to act pursuant to business considerations to make
profits.

Our
articles of association also state that we may contribute a reasonable amount
for an appropriate cause, even if the contribution is not within the framework
of our business considerations.

The Powers
of the Directors

The power
of our directors to vote on a proposal, arrangement or contract in which the
director is interested is limited by the relevant provisions of the Companies
Law.  In addition, the power of our
directors to vote on compensation to themselves or any members of their body is
limited in that such decision requires the approval of the audit committee, the
board of directors and the shareholders at a general meeting.  Please see Item 6C. Board Practices 
Approval of Related Party Transactions.

The powers
of our directors to borrow are not limited, except in the same manner as any
other transaction by the company.

60

---

---

Rights
Attached to Shares

Our
registered share capital is NIS 2,500,004 divided into a single class of
19,230,800 ordinary shares, par value NIS 0.13 per share, of which 12,371,206ordinary shares were outstanding as of
June 15, 2003.  All outstanding ordinary
shares are validly issued, fully paid and non-assessable.  The rights attached to the Ordinary Shares
are as follows:

Dividend
rights

Holders of
Ordinary Shares are entitled to the full amount of any cash or share dividend subsequently
declared. The Board of Directors may propose a dividend with respect to any
fiscal year only out of profits, in accordance with the provisions of the
Companies Law. Declaration of a dividend requires the approval of our board of
directors. Please see Item 10E. Additional Information  Taxation.

One year
after a dividend has been declared and is still unclaimed, the board of
directors is entitled to invest or utilize the unclaimed amount of dividend in
any manner to our benefit until it is claimed. We are not obligated to pay
interest or linkage differentials on an unclaimed dividend.

Voting
rights

Holders of
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. Currently there are no shares of capital stock
outstanding with special voting rights. The quorum required for an ordinary
meeting of shareholders consists of at least two shareholders present in person
or by proxy who hold or represent, in the aggregate, at least thirty three and
one third percent (33.3%) of our voting rights.  In the event that a quorum is not present within half an hour of
the scheduled time, the shareholders meeting will be adjourned to the same day
of the following week, at the same time and place, or such time and place as
the board of directors may determine by a notice to the shareholders.  If at such adjourned meeting a quorum is not
present at the time of opening of such meeting, two shareholders, at least,
present in person or by proxy, shall constitute a quorum.

An ordinary
resolution, such as a resolution for the election of directors, or the
appointment of auditors, requires the approval by the holders of a majority of
the voting rights represented at the meeting, in person, by proxy or through a
voting instrument and voting thereon. 
Under our articles of association, if a resolution to amend the articles
of association is recommended by our board of directors, such recommended
resolutions adoption in a general meeting of the shareholders requires an
ordinary majority. In any other case, such a resolution requires approval of a
special majority of more than three quarters of the votes of the shareholders
entitled to vote themselves, by proxy or through a voting instrument.

The
directors are appointed by an ordinary majority at a general meeting.  The directors have the right at any time, in
a resolution approved by at least a majority of our directors, to appoint any
person as a director, subject to the maximum number of directors specified in
our articles of association, to fill in a place which has randomly been vacated
or as an addition to the board of directors. Any such director so appointed
shall hold office until the next annual general meeting and may be reelected.

Under our
articles of association our directors are elected by an ordinary majority of
the shareholders at each duly convened annual meeting, and they serve until the
next annual meeting, provided that external directors shall be elected in
accordance with applicable law and/or relevant stock exchange rules applicable
to us. In each annual meeting the directors that were elected at the previous
annual meeting are deemed to have resigned from their office. A resigning
director may be reelected.

Rights in
the Companys profits

All of our
ordinary shares have the rights to share in our profits distributed as a
dividend and any other permitted distribution.

61

---

---

Rights in
the event of liquidation

All of our
ordinary shares confer equal rights among them with respect to amounts
distributed to shareholders in the event of liquidation.

Changing
Rights Attached to Shares

According
to our articles of association, our share capital may be divided into different
classes of shares or alter the rights of such shares by an ordinary majority
resolution passed by the general meetings of the holders of each class of
shares separately, or after obtaining the written consent of the holders of all
of the classes of shares.

Annual and
Extraordinary Meetings

Our board
of directors must convene an annual meeting of shareholders every year by no
later than the end of fifteen months from the last annual meeting. Notice of at
least twenty-one days prior to the date of the meeting is required. An extraordinary
meeting may be convened by the board of directors, as it decides or upon a
demand of any two directors or 25% of the directors, whichever is lower, or by
one or more shareholders holding in the aggregate at least 5% of the voting
rights in the Company.  Where the board
of directors is requisitioned to call a special meeting, it shall do so within
twenty-one days, for a date that shall not be later than thirty-five days from
the date on which the notice of the special meeting is published.

Limitations
on the Rights to Own Securities in the U.S.

Our
memorandum and articles of association do not restrict in any way the ownership
of our shares by nonresidents of Israel, and neither the memorandum and
articles of association nor Israeli law restricts the voting rights of
nonresidents of Israel, except that under Israeli law, any transfer or issue of
shares of the Company to a resident of a country under a state of war with
Israel is prohibited and shall have no affect, unless authorized by the Israeli
Minister of Finance.

Limitations on Change
in Control and Disclosure Duties

Our memorandum and articles of association do not restrict the change
of control nor do they impose any disclosure duties beyond the requirements set
out in  Israeli law. Please see Item
3D(b)--Risks Relating to Operations in Israel  Anti-takeover Provisions.

Changes in
Our Capital

Changes in
our capital are subject to the approval of the shareholders at a general
meeting by an ordinary majority of shareholders participating and voting in the
general meeting.

10.C
Material contracts

Separation
Agreement with Ran Eisenberg. 
On August 13, 2001, Mr. Ran Eisenberg, our former chief executive
officer, tendered his resignation. On August 30, 2001, an agreement was signed
between Mr. Eisenberg and us, according to which Mr. Eisenberg shall serve as
an advisor to our board of directors from April 28, 2002 until the earlier
of  (1) termination of the agreement by
us as a result of (i) a material breach of the agreement; (ii) willful
misconduct or acts in bad faith; or (iii) committal of a felony or a common law
fraud, against us; performed by Mr. Eisenberg; or (2) on August 30, 2002. In
consideration for his services, Mr. Eisenberg received $170,000 plus VAT, of
which 50% was paid on September 30, 2001 and the rest was paid in 2002. Mr.
Eisenberg was reimbursed for reasonable business expenditures incurred in
connection with the services and approved in advance by us.  This Agreement was filed under Form 6-K on
February 15, 2002.

62

---

---

Separation
Agreement with John Krooss. In connection with the separation of Mr. John Krooss employment
with us effective September 2001, we entered into a Separation Agreement and
General Release dated January 15, 2002, pursuant to which Mr. Krooss continues
to serve on our board of directors, and will, at his election and expense,
receive certain health insurance benefits. The Employment Agreement with Mr.
Krooss dated November 30, 2000 was terminated. 
We also agreed to indemnify Mr. Krooss in his capacity as a member of
the board of directors or officer for all periods commencing on or after
December 4, 2000 and to recommend to the our board of directors that Mr. Krooss
be granted additional options in an amount determined by the board of
directors.  In addition, as discussed
below, we agreed to release certain of Mr. Krooss shares in escrow in
connection with a settlement between us and the former shareholders of
Viewgraphics.  In July 2002, Mr. Krooss
resigned from his service as a director on our board of directors.

Settlement with
Former Shareholders of Viewgraphics. 
In connection with the acquisition of Viewgraphs and issuance of shares
to the former shareholders of Viewgraphics, we placed an aggregate of 716,933
shares into one-year escrow subject to such former shareholders
indemnification obligations under the merger agreement, and 319,488 shares into
a three-year escrow to provide for indemnification obligation of Mr. John Krooss
arising from representations related to the tax status of Viewgraphics.  We entered into a Settlement Agreement and
Release dated December 1, 2001 with the former shareholders, pursuant to which
we settled our claims against the former shareholders arising under the merger
agreement.  As part of the settlement,
as of January 15, 2002, 251,285 shares in escrow attributable to Mr. Krooss
were returned to Optibase (with Mr. Krooss undertaking to pay a specified amount
of damages to us resulting from any breach of certain representations under the
merger agreement), 322,857 shares for Mr. Krooss and 104,968 shares for his
childrens trust, or an aggregate of 427,825 escrow shares were released from
the escrow and 68,203 shares remain in escrow until the third anniversary of
the closing in connection with tax indemnification obligations under the merger
agreement.

Distribution
Agreement with BDX. On December 20, 2002, we entered into an agreement with BDX Beijing
Digital Express Center, or BDX our currently sole distributor in China for the
distribution of our open system, MGWXOO and
information value systems in China during 2003. Under the agreement BDX undertook to purchase from
us minimum quotas per each quarter of 2003. In the event BDX meets the target
set for 2003, BDX shall receive certain rebates, the total amount
of which shall not exceed $120,000, to be used by BDX for marketing activities.
In addition, we undertook to share with BDX other expenses incurred by BDX,
such as roadshows, CCBN and other marketing activities the total amount of
which shall not exceed $30,000.

10.D
Exchange controls

There are
no Israeli government laws, decrees or regulations that restrict or that affect
our export or import of capital or the remittance of dividends, interest or
other payments to non-resident holders of our securities, except or otherwise
as set forth under Item 10E. Additional Information Taxation.

Under
Israeli law (and our memorandum and articles of association), persons who are
neither residents nor nationals of Israel may freely hold, vote and transfer
ordinary shares in the same manner as Israeli residents or nationals.

10.E
Taxation

Israeli taxation

The
following is a discussion of Israeli and United States tax consequences
material to a U.S. shareholder.  To the
extent the discussion is based on new tax legislation, which has not been
subject to judicial or administrative interpretation, the views expressed in
the discussion might not 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 does not exhaust all
possible tax considerations.  Holders of
our ordinary shares should consult their own tax advisors as to the United
States, Israeli or other tax consequences of the purchase, ownership and
disposition of ordinary shares, including, in particular, the effect of any
non-U. S., state or local taxes.

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

63

---

---

General
Corporate Tax Structure in Israel. 
The regular rate of corporate tax to which Israeli companies are subject
is 36%. However, the effective rate of tax of a company that is qualified under
Israeli law as an Industrial Company (as referred to below) and that derives
income from an Approved Enterprise (as referred to below) may be considerably
lower.

We
currently qualify as an Industrial Company pursuant to the Law for the
Encouragement of Industry (Taxes), 1969 (the Industry Law). A company
qualifies as an Industrial Company if it is resident in Israel and at least
90% of its income in a given tax year, determined in NIS (exclusive of income
from certain specified sources), is derived from Industrial Enterprises owned
by that company. An Industrial Enterprise is defined as an enterprise whose
major activity in a particular tax year is industrial manufacturing activity.
As an Industrial Company, we are entitled to certain tax benefits, including a
deduction of 12.5% per annum of the purchase of patents or certain other
intangible property rights. See Note (12) to our consolidated financial
statements.

Our
production facilities have been granted Approved Enterprise status under the
Law for Encouragement of Capital Investments, 1959 and consequently are
eligible for certain tax benefits for the first several years in which they
generate taxable income. We have elected to participate in the Alternative
Benefits Program with respect to our 
Approved Enterprises. The income derived from our facilities that were
granted Approved Enterprise status is exempt from income tax in Israel for
two years commencing in the year in which the specific Approved Enterprises
first generates taxable income. Following such two-year period, the Approved
Enterprises are subject to corporate tax at a reduced rate of 15-25% for an
additional period of five to eight years (subject to an adjustment based upon the
non-Israel investors ownership of us). Please see Note (12) to our
consolidated financial statements.

A company
owning an Approved Enterprise may elect to forego entitlement to grants
otherwise available as a result of an Approved Enterprise in return for an
alternative package of benefits. Under the alternative package of benefits, a
companys undistributed income derived from an Approved Enterprise will be
exempt from company tax for a period of between two and ten years from the
first year of taxable income, depending on the geographic location of the
Approved Enterprise within Israel, and the company will be eligible for a
reduced tax rate for the remainder of the benefits period.  The law also grants entitlement to claim
accelerated depreciation on equipment used by the "Approved
Enterprise" during five tax years. A foreign investors company, as
defined in the Investment Law, may enjoy benefits for an extended period of up
to ten years, or twelve years, if it complies with certain export criteria
stipulated in the Investment Law.

The period
of tax benefits detailed above is limited to the earlier of 12 years from the
commencement of production, or 14 years from receiving the approval. The tax
benefits are scheduled to gradually expire from 2003 through 2014.

The
Investment Center bases its decision whether or not to approve an application
on the criteria set forth in the Investment Law and regulations, the then
prevailing policy of the Investment Center, and the specific objectives and
financial criteria of the applicant. Therefore, we cannot assure you that any
applications we may make in the future will be approved. The entitlement to the
above benefits is conditional upon our fulfilling the conditions stipulated by
the above law, regulations published thereunder and the instruments of approval
for the specific investments in "Approved Enterprises."  In the event of failure to comply with these
conditions, the benefits may be canceled and we may be required to refund the amount
of the benefits, in whole or in part, including interest.

Should we
derive income from sources other than the "Approved Enterprise"
during the relevant period of benefits, such income will be taxable at the
regular corporate tax rates of 36%.

The
tax-exempt income attributable to the Approved Enterprise can be distributed
to shareholders without subjecting us to taxes only upon our complete
liquidation.  We have decided not to
declare dividends out of such tax-exempt income.

64

---

---

In
the event a company is operating under more than one approval or its capital
investments are only partly approved, its effective tax rate is a weighted
combination of the various applicable tax rates.

Eligibility
for benefits under the Industry Law is not contingent upon the approval of any
Government agency. No assurance can be given that we will continue to qualify
as an Industrial Company, or will be able to avail us of any benefits under the
Industry Law in the future.

Special
Provisions Relating to Taxation under Inflationary Conditions. The
Income Tax Law (Inflationary Adjustments), 1985, generally referred to as the
Inflationary Adjustments Law, represents an attempt to overcome the problems
presented to a traditional tax system by an economy undergoing rapid inflation.
The Inflationary Adjustments Law is highly complex. Below we describe those
features which are material to us:

| |  | There is a
  special tax adjustment for the preservation of equity which classifies corporate
  assets into fixed assets and non-fixed assets. Where a companys equity, as
  defined in the law, exceeds the depreciated cost of fixed assets, a deduction
  from taxable income that takes into account the effect of the applicable
  annual rate of inflation on the excess is allowed up to a ceiling of 70% of
  taxable income in any single tax year, with the unused portion permitted to
  be carried forward on a linked basis. If the depreciated cost of fixed assets
  exceeds a companys equity, then the excess multiplied by the applicable
  annual rate of inflation is added to taxable income.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | Subject to
  specified limitations, depreciation deductions on fixed assets and losses
  carried forward are adjusted for inflation based on the increase in the
  consumer price index.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | In specified
  circumstances, gains on traded securities, which might otherwise be eligible
  for reduced rates of tax, will be subject to company tax at the rate of 36%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

Although
the Law for the Encouragement of Capital Investment, 1959 provides that no new
benefits may be granted after May 2003, we expect that this date could be
extended, as has been the case in the past. There can be no assurance that new
benefits will be available after May 2003. Since we have already been granted
approved enterprise status under this Law, the deadline does not have any
affect on our status or on the benefits we receive.

Capital
Gains Tax on Sales of Our Ordinary Shares.  Israeli law generally imposes a capital gains tax on the sale of
capital assets located in Israel, including shares in Israeli resident
companies, by both residents and non-residents of Israel, unless a specific
exemption is available, or unless a treaty between Israel and the country of
the non-resident provides otherwise. Regulations promulgated under the Israeli
Income Tax Ordinance provided for an exemption from Israeli capital gains tax
for gains accrued before January 1, 2003 and derived from the sale of shares of
an Industrial Company, as defined by the Industry Encouragement Law, that are
traded on specified non-Israeli markets, including The NASDAQ National Market,
provided that the sellers purchased their shares either in the companys
initial public offering or in public market transactions thereafter.  This exemption does not apply to
shareholders who are in the business of trading securities, or to shareholders
that are Israeli resident companies subject to the Income Tax (Adjustments for
Inflation) Law, 1985. We believe that we are currently an Industrial Company,
as defined by the Industry Encouragement Law. The status of a company as an
Industrial Company may be reviewed by the tax authorities from time to time.
There can be no assurance that the Israeli tax authorities will not deny our
status as an Industrial Company, possibly with retroactive effect.

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

65

---

---

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

Taxation of
Non-Resident Holders of Shares. 
Non-residents of Israel are subject to income tax on income accrued or
derived from sources in Israel.  These
sources of income include passive income, including dividends, royalties and
interest, as well as non-passive income from services provided in Israel.  On distributions of dividends other than
bonus shares or stock dividends, income tax is withheld at source.  Unless a different rate is provided in a
treaty between Israel and the shareholders country of residence, the
withholding rate is as follows:

|Dividends generated by an
  Approved Enterprise  |  | Dividends not generated by an
  Approved Enterprise | 
|------------------------------------------------ |  | --------------------------------------------------- | 
|                                                 |  |                                                     | 
|U.S. company holding
  10% or more of our shares |  | Other
  non-resident                                | 
|                                                 |  |                                                     | 
|15%                                              |  | 15%                                                 | 

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

Foreign
Exchange Regulations.  We are
permitted to pay in Israeli and non-Israeli currency: -

| |  | dividends to
  holders of our ordinary shares; and                                                            
| | - | --------------------------------------------------------------------------------------------------------------
| |  | any amounts
  payable to the holders of our ordinary shares upon our dissolution,
  liquidation or winding up.

If
we make any payments in Israeli currency, the payments may be converted into
freely repatriable dollars at the rate of exchange prevailing at the time of
conversion.

United
States Federal Income Tax Consequences.  The following is a summary of certain material U.S. federal
income tax consequences that apply to U.S. Holders who hold ordinary shares as
capital assets.  This summary is based
on the United States Internal Revenue Code of 1986, as amended (the Code),
Treasury regulations promulgated thereunder, judicial and administrative
interpretations thereof, and the U.S.-Israel Tax Treaty, all as in effect on
the date hereof and all of which are subject to change either prospectively or
retroactively.  This summary does not
address all tax considerations that may be relevant with respect to an
investment in ordinary shares.  This
summary does not account for the specific circumstances of any particular
investor, such as:

| |  | broker-dealers,                                
| | - | -----------------------------------------------
| |  | financial
  institutions,                      
| |  | certain
  insurance companies,                 
| |  | investors
  liable for alternative minimum tax,
| |  | tax-exempt
  organizations,                    

66

---

---

| |  | non-resident
  aliens of the U.S. or taxpayers whose functional currency is not the U.S.
  dollar, 
| | - | ---------------------------------------------------------------------------------------------------
| |  | persons who
  hold the ordinary shares through partnerships or other pass-through entities,        
| |  | investors
  that actually or constructively own 10 percent or more of our voting shares,
  and     
| |  | investors
  holding ordinary shares as part of a straddle or a hedging or conversion
  transaction.

This
summary does not address the effect of any U.S. Federal taxation other than
U.S. Federal income taxation.  In
addition, this summary does not include any discussion of state, local or
foreign taxation.  You are urged to
consult your tax advisors regarding the non-U. S. and United States federal,
state and local tax considerations of an investment in ordinary shares.

For purposes of
this summary, a U.S. Holder is:

| |  |  | an
  individual who is a citizen or, for U.S. federal income tax purposes, a
  resident of the United States;                                                                                                                                      
| |  | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | a
  partnership, corporation or other entity created or organized in or under the
  laws of the United States or any political subdivision thereof;                                                                                                
| |  |  | an estate
  whose income is subject to U.S. federal income tax regardless of its
  source;                                                                                                                                                         
| |  |  | a trust if:
  (a) a court within the United States is able to exercise primary supervision
  over administration of the trust, and (b) one or more United States persons
  have the authority to control all substantial decisions of the trust; or
| |  |  | a trust, if
  the trust were in existence and qualified as a United States person, within
  the meaning of the Code, on August 20, 1996 under the law as then in effect
  and elected to continue to be so treated.                              

Taxation of
Dividends.  The gross amount
of any distributions received with respect to ordinary shares, including the
amount of any Israeli taxes withheld therefrom, will constitute dividends for
U.S. Federal income tax purposes, to the extent of our current and accumulated
earnings and profits as determined for U.S. federal income tax principles.  You will be required to include this amount
of dividends in gross income as ordinary income.  Distributions in excess of our earnings and profits will be
treated as a non-taxable return of capital to the extent of your tax basis in
the ordinary shares and any amount in excess of your tax basis, will be treated
as gain from the sale of ordinary shares. 
See --Disposition of Ordinary Shares below for the discussion on the
taxation of capital gains.  Dividends
will not qualify for the dividends-received deduction generally available to
U.S. corporations under Section 243 of the Code.

Recently
enacted amendments to the Code, as amended, provide that dividend income may be
eligible for a reduced rate of taxation. Dividend income will be taxed at the
applicable long-term capital gains rate if the dividend is received from a
"qualified foreign corporation," and the shareholder of such foreign
corporation holds such stock for more than 60 days during the 120-day period
that begins on the date that is 60 days before the ex-dividend date for the
stock. The holding period is tolled for any days on which the shareholder has
reduced his risk of loss. A "qualified foreign corporation" is one
that is eligible for the benefits of a comprehensive income tax treaty with the
United States. A foreign corporation will be treated as qualified with respect
to any dividend paid, if its stock is readily tradable on an established
securities market.

Dividends
that we pay in NIS, including the amount of any Israeli taxes withheld
therefrom, will be included in your income in a U.S. dollar amount calculated
by reference to the exchange rate in effect on the day such dividends are
received.  A U.S. Holder who receives
payment in NIS and converts NIS into U.S. dollars at an exchange rate other than
the rate in effect on such day may have a foreign currency exchange gain or
loss that would be treated as U.S. source ordinary income or loss.  U.S. Holders should consult their own tax
advisors concerning the U.S. tax consequences of acquiring, holding and
disposing of NIS.

67

---

---

Any
Israeli withholding tax imposed on such dividends will be a foreign income tax
eligible for credit against a U.S. Holders U.S. federal income tax liability,
subject to certain limitations set out in the Code (or, alternatively,
for deduction against income in determining such tax liability).  The limitations set out in the Code include
computational rules under which non-U.S. tax credits allowable with respect to
specific classes of income cannot exceed the U.S. federal income taxes
otherwise payable with respect to each such class of income.  Dividends generally will be treated as
foreign-source passive income or financial services income for United States
foreign tax credit purposes.  Foreign
income taxes exceeding the credit limitation for the year of payment or accrual
may be carried back for two taxable years and forward for five taxable years in
order to reduce U.S. federal income taxes, subject to the credit limitation
applicable in each of such years.  Other
restrictions on the foreign tax credit include a prohibition on the use of the
credit to reduce liability for the U.S. individual and corporation alternative
minimum taxes by more than 90%.  A U.S.
Holder will be denied a foreign tax credit with respect to Israeli income tax
withheld from dividends received on the ordinary shares to the extent such U.S.
Holder has not held the ordinary shares for at least 16 days of the 30-day
period beginning on the date which is 15 days before the ex-dividend date or to
the extent such U.S. Holder is under an obligation to make related payments
with respect to substantially similar or related property.  Any days during which a U.S. Holder has
substantially diminished its risk of loss on the ordinary shares are not counted
toward meeting the 16-day holding period required by the statute.  The rules relating to the determination of
the foreign tax credit are complex, and you should consult with your personal
tax advisors to determine whether and to what extent you would be entitled to
this credit.

Dispositions
of Ordinary Shares.  If you
sell or otherwise dispose of ordinary shares, you will recognize gain or loss
for U.S. Federal income tax purposes in an amount equal to the difference
between the amount realized on the sale or other disposition and the adjusted
tax basis in ordinary shares.  Subject
to the discussion below under the heading Passive Foreign Investment
Companies, such gain or loss generally will be capital gain or loss and will
be long-term capital gain or loss if you have held the ordinary shares for more
than one year at the time of the sale or other disposition.  In general, any gain that you recognize on
the sale or other disposition of ordinary shares will be U.S.-source for
purposes of the foreign tax credit limitation; losses will generally be
allocated against U.S. source income. 
Deduction of capital losses is subject to certain limitations under the
Code.

In the case
of a cash basis U.S. Holder who receives NIS in connection with the sale or
disposition of ordinary shares, the amount realized will be based on the U.S.
dollar value of the NIS received with respect to the ordinary shares as
determined on the settlement date of such exchange.  A U.S. Holder who receives payment in NIS and converts NIS into
United States dollars at a conversion rate other than the rate in effect on the
settlement date may have a foreign currency exchange gain or loss that would be
treated as U.S. source ordinary income or loss.

Passive
Foreign Investment Companies.There is a substantial risk that we are a passive
foreign investment company, or PFIC, for U.S. federal income tax purposes. Our
treatment as a PFIC could result in a reduction in the after-tax return to the
U.S. Holders of our ordinary shares
and may cause a reduction in the value of such shares.

For U.S. federal income tax purposes, we will be
classified as a PFIC for any taxable year in which either (i) 75% or more of
our gross income is passive income, or (ii) at least 50% of the average value
of all of our assets for the taxable year produce or are held for the
production of passive income. For this purpose, cash is considered to be an
asset which produces passive income. Passive income includes dividends,
interest, royalties, rents, annuities and the excess of gains over losses from
the disposition of assets which produce passive income. As a result of our
substantial cash position and the decline in the value of our stock, we are a
PFIC under a literal application of the asset test that looks solely to market
value. If we are a PFIC for U.S. federal income tax purposes, U.S. Holders of
our ordinary shares would be required, in certain circumstances, to pay an
interest charge together with tax calculated at maximum rates on certain
"excess distributions," including any gain on the sale of ordinary
shares.

The consequences
described above can be mitigated if the U.S. Holder makes an election to treat
us as a qualified electing fund, or QEF. A shareholder making the QEF election
is required for each taxable year to include in income a pro rata share of the
ordinary earnings and net capital gain of the QEF, subject to a separate
election to defer payment of taxes, which deferral is subject to an interest
charge. We have agreed to supply U.S. Holders with the information needed to
report income and gain pursuant to a QEF election. The QEF election is made on
a shareholder-by-shareholder basis and can be revoked only with the consent of
the Internal Revenue Service, or IRS.

As an alternative to making the QEF election, the
U.S. Holder of PFIC stock which is publicly traded could mitigate the
consequences of the PFIC rules by electing to mark the stock to market
annually, recognizing as ordinary income or loss each year an amount equal to
the difference as of the close of the taxable year between the fair market
value of the PFIC stock and the U.S. Holders adjusted tax basis in the PFIC
stock. Losses would be allowed only to the extent of net mark-to-market gain
previously included by the U.S. Holder under the election for prior taxable
years.  All U.S. Holders are advised to
consult their own tax advisers about the PFIC rules generally and about the
advisability, procedures and timing of their making any of the available tax
elections, including the QEF or mark-to-market elections.

68

---

---

Backup
Withholding and Information Reporting.  Payments in respect of ordinary shares may
be subject to information reporting to the U.S. Internal Revenue Service and to
a 30 percent U.S. backup withholding tax. 
Backup withholding will not apply, however, if you (i) are a corporation
or come within certain exempt categories, and demonstrate the fact when so
required, or (ii) furnish a correct taxpayer identification number and make any
other required certification.  Any
amount withheld under these rules may be credited against your federal income
tax liability.

Backup
withholding is not an additional tax. 
Amounts withheld under the backup withholding rules may be credited
against a U.S. Holders U.S. tax liability, and a U.S. Holder may obtain a
refund of any excess amounts withheld under the backup withholding rules by
filing the appropriate claim for refund with the IRS.  Any U.S. holder who holds 10% or more in vote or value of our
ordinary shares may be subject to certain additional United States information
reporting requirements.

U.S.
Gift and Estate Tax. 
An individual U.S. Holder of ordinary shares will be subject to U.S.
gift and estate taxes with respect to ordinary shares in the same manner and to
the same extent as with respect to other types of personal property.

| | 10.F Dividend and paying agents.
| | --------------------------------

Not
required.

| | 10.G Statement by experts
| | -------------------------

Not
required.

| | 10.H Documents on display
| | -------------------------

Reports
and other information of Optibase filed electronically with the U.S. Securities
and Exchange Commission may be found at www.sec.gov. They can also be inspected
without charge and copied at prescribed rates at the public reference
facilities maintained by the SEC in room 1024, 450 Fifth Avenue. N.W.
Washington, D.C. 20549. Copies of this material are also available by mail from
the Public Reference Section of the SEC, at 450 Fifth Street, N.W. Washington,
D.C. 20549, at prescribed rates.

| | 10.I Subsidiary information
| | ---------------------------

Not
required.

Item 11. Quantitative and Qualitative Disclosure About Market Risk

Most
of our revenues are generated in U.S. dollars but a portion of our expenses are
incurred in NIS.  Therefore, our results
of operations may be seriously harmed by inflation in Israel and currency
fluctuations.  As a result, we are
exposed to risk to the extent that the rate of inflation in Israel exceeds the
rate of devaluation of the NIS in relation to the dollar or if the timing of devaluation
lags behind inflation in Israel.  In
that event, the dollar cost of our operations in Israel will increase and our
dollar-measured results of operations will be adversely affected.  Our operations also could be adversely
affected if we are unable to guard against currency fluctuations in the future.
 Accordingly, we may enter, but so far have not entered, into currency
hedging transactions to decrease the risk of financial exposure from
fluctuations in the exchange rate of the dollar against the NIS.  These measures, however, may not adequately
protect us from material adverse effects due to the impact of inflation in
Israel.

Interest
Rate and Rating Risks

Our
exposure to market risk for changes in interest rates in the U.S. relates
primarily to our investment in marketable securities.  Our marketable securities are comprised mainly of corporate bonds
and U.S. Government and Agencies bonds. The fair value of our long and
short-term securities is based upon their market values. Changes in U.S.
interest rates, as well as rating changes done by the leading rating agencies,
to the bonds issuers, could affect our financial results.

69

---

---

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.      Controls and Procedures

Disclosure
controls and procedures.Optibases Chief Executive
Officer and Chief Financial Officer have evaluated the effectiveness of its
disclosure controls and procedures within the 90 days prior to the date of
filing of this Annual Report on Form 20-F. Based upon such review, the
Chief Executive Officer and Chief Financial Officer have concluded that
Optibase has in place appropriate controls and procedures designed to ensure
that information required to be disclosed by Optibase in the reports it files
or submits under the Securities Exchange Act of 1934, as amended, and the rules
thereunder, is recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms.

Internal
controls. Since the date of the evaluation described
above, there have not been any significant changes in Optibases internal
controls or in other factors that could significantly affect those controls.

Item 16.

Reserved.

Item
17.

Not
Applicable.

| | Part III
| | --------

Item 18.   
Financial Statements

| | The
  following financial statements of the Company and the auditors report are
  hereby attached. |        
| | --------------------------------------------------------------------------------------------------- | -------
| |                                                                                                     |        
| | Index to
  Consolidated Financial Statements                                                        | F-1    
| | Report of
  Independent Auditors                                                                    | F-2    
| | Consolidated
  Balance Sheets                                                                       | F-3F-4
| | Consolidated
  Statements of Operations                                                             | F-5    
| | Statements
  of Changes in Shareholders Equity                                                     | F-6-F-8
| | Consolidated
  Statements of Cash Flows                                                             | F-9-F10
| | Notes to
  Consolidated Financial Statements                                                        | F11-F40

70

---

---

Item
19.    Exhibits and financial statement
schedules

| | (a)                                                                                  | Financial Statement Schedules
| | ------------------------------------------------------------------------------------ | -----------------------------
| |                                                                                      |                              
| | Schedule II     Schedule
  of Valuation and Qualifying Accounts at December 31, 2002

SCHEDULE II OPTIBASE LTD.

SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
AT DECEMBER 31, 2002

|                                  |  | Balance at
  beginning of
  period |      | Provision for
  doubtful 
  accounts |  | Write-off of 
  previously provided 
  accounts |  | Balance at 
  end of 
  period |         
|--------------------------------- |  | ---------------------------------- | ---- | ------------------------------------ |  | ----------------------------------------------- |  | ------------------------------ | --------
|                                  |  |                                    |      |                                      |  |                                                 |  |                                |         
|                                  |  | (Dollars in thousands)             |     
|Year ended
  December 31, 2002    |  |                                    |      |                                      |  |                                                 |  |                                |         
|Allowance
  for doubtful accounts |  |                                    | $739 |                                      |  | $278                                            |  |                                | $ (203) 
|Year ended
  December 31, 2001    |  |                                    |      |                                      |  |                                                 |  |                                |         
|Allowance
  for doubtful accounts |  |                                    | $453 |                                      |  | $377                                            |  |                                | $   (91)
|Year ended
  December 31, 2000    |  |                                    |      |                                      |  |                                                 |  |                                |         
|Allowance
  for doubtful accounts |  |                                    | $188 |                                      |  | $313                                            |  |                                | $   (48)

Other schedules are omitted because they are not required or
the required information is shown in the financial statements or notes thereto.

| | (b) | Exhibits
| | --- | --------

|Exhibit 
  Number |  | Description of Document
|----------------- |  | -----------------------
|                  |  |                        
|1.1               |  |                        
|1.2               |  |                        
|(a)2.1            |  |                        
|(a)4.1            |  |                        
|(a)4.2            |  |                        
|(e)4.3            |  |                        

71

---

---

|Exhibit 
  Number |  | Description of Document
|----------------- |  | -----------------------
|                  |  |                        
|(e)4.4            |  |                        
|(c)4.5            |  |                        
|(c)4.6            |  |                        
|4.7               |  |                        
|4.8               |  |                        
|4.9               |  |                        
|8.1               |  |                        
|(b)10.1           |  |                        
|(b)10.2           |  |                        
|(b)10.3           |  |                        
|(b)10.4           |  |                        
|(d)10.5           |  |                        
|(a)10.4           |  |                        
|10.5              |  |                        
|10.6              |  |                        

| | (a) | Incorporated
  by reference to exhibits filed with the Form 6-K filed on December 7, 2000.                                                                                                                                                             
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                        
| | (b) | Incorporated
  by reference to exhibits filed with the Registrants Annual Report on Form
  20-F for the fiscal year ended December 31, 1999.                                                                                                          
| |     |                                                                                                                                                                                                                                                        
| | (c) | Incorporated by reference to exhibits filed with the Form 6-K filed on
  February 15, 2002.                                                                                                                                                            
| |     |                                                                                                                                                                                                                                                        
| | (d) | Incorporated by reference to Exhibit 10.5 filed with the Registrants
  Annual Report on Form 20-F for the fiscal year ended December 31, 2000, and
  with respect to the amendment, Exhibit 99.7 filed with the Form 6-K filed on
  February 15, 2002.
| |     |                                                                                                                                                                                                                                                        
| | (e) | Incorporated by reference to Exhibits 4.3 and 4.4 filed with the
  Registrants Annual Report on Form 20-F for the fiscal year ended December
  31, 2001.                                                                                              

72

---

---

OPTIBASE LTD. AND ITS SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2002

IN U.S. DOLLARS

INDEX

|                                              | Page       
|--------------------------------------------- | -----------
|                                              |            
|                                              |            
|Report of Independent Auditors                | F-2        
|                                              |            
|Consolidated Balance Sheets                   | F-3 - F-4  
|                                              |            
|Consolidated Statements of Operations         | F-5        
|                                              |            
|Statements of Changes in Shareholders Equity | F-6 - F-8  
|                                              |            
|Consolidated Statements of Cash Flows         | F-9 - F-10 
|                                              |            
|Notes to Consolidated Financial Statements    | F-11 - F-40

- - - - - - - - - - -

---

---

ERNST
&YOUNG

REPORT OF INDEPENDENT AUDITORS

To the Shareholders of

OPTIBASE LTD.

We have
audited the accompanying consolidated balance sheets of Optibase Ltd. (the
Company) and its subsidiaries as of December 31, 2001 and 2002, and the
related consolidated statements of operations, changes in shareholders equity and
cash flows for each of the three years in the period ended December 31, 2002.
Our audits also included the financial statement schedules listed at item
19(a). These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We
conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 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 consolidated financial statements referred to above, present
fairly, in all material respects, the consolidated financial position of
Optibase Ltd. and its subsidiaries as of December 31, 2001 and 2002, and the
consolidated results of their operations and cash flows for each of the three
years in the period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States.

|Tel-Aviv, Israel    |  | KOST FORER & GABBAY             
|------------------- |  | --------------------------------
|February 10,
  2003 |  | A Member of Ernst & Young Global

F - 2

---

---

|OPTIBASE LTD. AND ITS SUBSIDIARIES
|----------------------------------
|CONSOLIDATED BALANCE SHEETS       
|                                  
|U.S. dollars in thousands         

|                                       |                                                                                                                                                  | December 31, |       
|-------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------ | ------------ | ------
|                                       |                                                                                                                                                  |              |       
|                                       |                                                                                                                                                  | 2001         |       
|                                       |                                                                                                                                                  |              |       
|                                       | ASSETS                                                                                                                                           |              |       
|                                       |                                                                                                                                                  |              |       
|CURRENT ASSETS:                        |                                                                                                                                                  |              |       
|                                       | Cash and
  cash equivalents                                                                                                                      |              | $     
|                                       | Marketable
  securities (Note 3)                                                                                                                 |              |       
|                                       | Trade
  receivables (net of allowance for doubtful accounts of $739 and
       $814 as of December 31, 2001 and 2002,
  respectively) (Note 16a) |              |       
|                                       | Other
  accounts receivable and prepaid expenses (Note 4)                                                                                        |              |       
|                                       | Inventories
  (Note 5)                                                                                                                           |              |       
|                                       |                                                                                                                                                  |              |       
|                                       |                                                                                                                                                  |              |       
|Total
  current assets                 |                                                                                                                                                  |              | 54,681
|                                       |                                                                                                                                                  |              |       
|                                       |                                                                                                                                                  |              |       
|LONG-TERM
  INVESTMENTS:               |                                                                                                                                                  |              |       
|                                       | Long-term
  lease deposits (Note 11a)                                                                                                            |              |       
|                                       | Marketable
  securities (Note 3)                                                                                                                 |              |       
|                                       | Severance
  pay fund                                                                                                                             |              |       
|                                       | Investment
  in companies (Note 6)                                                                                                               |              |       
|                                       |                                                                                                                                                  |              |       
|                                       |                                                                                                                                                  |              |       
|Total
  long-term investments          |                                                                                                                                                  |              | 5,020 
|                                       |                                                                                                                                                  |              |       
|                                       |                                                                                                                                                  |              |       
|PROPERTY AND
  EQUIPMENT, NET (Note 7) |                                                                                                                                                  |              | 3,044 
|                                       |                                                                                                                                                  |              |       
|                                       |                                                                                                                                                  |              |       
|OTHER
  ASSETS, NET (Note 8)           |                                                                                                                                                  |              | 8,792 
|                                       |                                                                                                                                                  |              |       
|                                       |                                                                                                                                                  |              |       
|                                       |                                                                                                                                                  | $            | 71,537
|                                       |                                                                                                                                                  |              |       

The
accompanying notes are an integral part of the consolidated financial
statements.

F - 3

---

---

|OPTIBASE LTD. AND ITS SUBSIDIARIES           
|---------------------------------------------
|                                             
|CONSOLIDATED BALANCE SHEETS                  
|                                             
|U.S. dollars in thousands (except share data)

|                                                   |                                                                                                                                                                                                                                                                                                                                                     | December 31, |       
|-------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------ | ------
|                                                   |                                                                                                                                                                                                                                                                                                                                                     |              |       
|                                                   |                                                                                                                                                                                                                                                                                                                                                     | 2001         |       
|                                                   |                                                                                                                                                                                                                                                                                                                                                     |              |       
|                                                   | LIABILITIES
  AND SHAREHOLDERS EQUITY                                                                                                                                                                                                                                                                                                              |              |       
|                                                   |                                                                                                                                                                                                                                                                                                                                                     |              |       
|CURRENT
  LIABILITIES:                             |                                                                                                                                                                                                                                                                                                                                                     |              |       
|                                                   | Current
  maturities of long-term capital lease obligations                                                                                                                                                                                                                                                                                         |              | $     
|                                                   | Trade
  payables                                                                                                                                                                                                                                                                                                                                    |              |       
|                                                   | Deferred
  revenues                                                                                                                                                                                                                                                                                                                                 |              |       
|                                                   | Other
  accounts payable and accrued expenses (Note 9)                                                                                                                                                                                                                                                                                              |              |       
|                                                   |                                                                                                                                                                                                                                                                                                                                                     |              |       
|                                                   |                                                                                                                                                                                                                                                                                                                                                     |              |       
|Total
  current liabilities                        |                                                                                                                                                                                                                                                                                                                                                     |              | 9,555 
|                                                   |                                                                                                                                                                                                                                                                                                                                                     |              |       
|                                                   |                                                                                                                                                                                                                                                                                                                                                     |              |       
|LONG-TERM
  LIABILITIES:                           |                                                                                                                                                                                                                                                                                                                                                     |              |       
|                                                   | Long-term
  capital lease obligations, net of current maturities                                                                                                                                                                                                                                                                                    |              |       
|                                                   | Accrued
  severance pay                                                                                                                                                                                                                                                                                                                             |              |       
|                                                   |                                                                                                                                                                                                                                                                                                                                                     |              |       
|                                                   |                                                                                                                                                                                                                                                                                                                                                     |              |       
|Total
  long-term liabilities                      |                                                                                                                                                                                                                                                                                                                                                     |              | 1,723 
|                                                   |                                                                                                                                                                                                                                                                                                                                                     |              |       
|                                                   |                                                                                                                                                                                                                                                                                                                                                     |              |       
|COMMITMENTS
  AND CONTINGENT LIABILITIES (Note 11) |                                                                                                                                                                                                                                                                                                                                                     |              |       
|                                                   |                                                                                                                                                                                                                                                                                                                                                     |              |       
|SHAREHOLDERS
  EQUITY (Note 13):                  |                                                                                                                                                                                                                                                                                                                                                     |              |       
|Share
  capital:                                   |                                                                                                                                                                                                                                                                                                                                                     |              |       
|                                                   | Ordinary
  shares of NIS 0.13 par value -
       Authorized: 19,230,800 shares as of December
  31, 2001 and 2002;
       Issued: 12,495,851 shares as of December 31,
  2001 and 12,872,411
       shares as of December 31, 2002; Outstanding:
  11,964,828 shares as of
       December 31, 2001 and 12,341,388 shares as of
  December 31, 2002 |              |       
|                                                   | Additional
  paid-in capital                                                                                                                                                                                                                                                                                                                        |              |       
|                                                   | Treasury
  shares                                                                                                                                                                                                                                                                                                                                   |              |       
|                                                   | Deferred
  stock compensation                                                                                                                                                                                                                                                                                                                       |              |       
|                                                   | Accumulated
  other comprehensive income                                                                                                                                                                                                                                                                                                            |              |       
|                                                   | Accumulated
  deficit                                                                                                                                                                                                                                                                                                                               |              |       
|                                                   |                                                                                                                                                                                                                                                                                                                                                     |              |       
|                                                   |                                                                                                                                                                                                                                                                                                                                                     |              |       
|Total
  shareholders equity                       |                                                                                                                                                                                                                                                                                                                                                     |              | 60,259
|                                                   |                                                                                                                                                                                                                                                                                                                                                     |              |       
|                                                   |                                                                                                                                                                                                                                                                                                                                                     |              |       
|                                                   |                                                                                                                                                                                                                                                                                                                                                     | $            | 71,537
|                                                   |                                                                                                                                                                                                                                                                                                                                                     |              |       

The
accompanying notes are an integral part of the consolidated financial
statements.

F - 4

---

---

|OPTIBASE LTD. AND ITS SUBSIDIARIES               
|-------------------------------------------------
|                                                 
|CONSOLIDATED STATEMENTS OF OPERATIONS            
|                                                 
|U.S. dollars in thousands (except per share data)

|                                                                                                                 |                                                           | Year ended December 31, |        
|---------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------- | ----------------------- | -------
|                                                                                                                 |                                                           |                         |        
|                                                                                                                 |                                                           | 2000                    |        
|                                                                                                                 |                                                           |                         |        
|Revenues
  (Notes 15 and 16b)                                                                                    |                                                           | $                       | 30,699 
|Cost of
  revenues (Note 16c)                                                                                    |                                                           |                         | 13,100 
|                                                                                                                 |                                                           |                         |        
|Gross profit                                                                                                     |                                                           |                         | 17,599 
|                                                                                                                 |                                                           |                         |        
|Operating
  expenses:                                                                                            |                                                           |                         |        
|                                                                                                                 | Research and
  development, net (Note 17a)                |                         |        
|                                                                                                                 | Selling and
  marketing                                   |                         |        
|                                                                                                                 | General and
  administrative                              |                         |        
|                                                                                                                 | Impairment
  of other assets (Note 1c)                    |                         |        
|                                                                                                                 | Restructuring
  charges (Notes 14 and 1d)                 |                         |        
|                                                                                                                 | In-process
  research and development write-off (Note 1b) |                         |        
|                                                                                                                 |                                                           |                         |        
|Total
  operating expenses                                                                                       |                                                           |                         | 31,653 
|                                                                                                                 |                                                           |                         |        
|Operating
  loss                                                                                                 |                                                           |                         | (14,054
|Other income
  (expenses), net                                                                                   |                                                           |                         | 9      
|Financial
  income, net (Note 17b)                                                                               |                                                           |                         | 5,083  
|                                                                                                                 |                                                           |                         |        
|Loss before
  provision for tax                                                                                  |                                                           |                         | (8,962 
|Provision
  for tax (Note 12)                                                                                    |                                                           |                         | -      
|                                                                                                                 |                                                           |                         |        
|Loss after
  provision for tax                                                                                   |                                                           |                         | (8,962 
|Equity in
  losses of an affiliate                                                                               |                                                           |                         | -      
|                                                                                                                 |                                                           |                         |        
|Net loss
  before cumulative effect of accounting change                                                         |                                                           |                         | (8,962 
|Cumulative
  effect of accounting change                                                                         |                                                           |                         | -      
|                                                                                                                 |                                                           |                         |        
|Net loss                                                                                                         |                                                           | $                       | (8,962 
|                                                                                                                 |                                                           |                         |        
|Net loss per
  share:                                                                                            |                                                           |                         |        
|Before
  cumulative effect of accounting change - basic and
       diluted                                       |                                                           | $                       | (0.79  
|                                                                                                                 |                                                           |                         |        
|Cumulative
  effect of accounting change - basic and diluted                                                     |                                                           | $                       | -      
|                                                                                                                 |                                                           |                         |        
|Basic and
  diluted                                                                                              |                                                           | $                       | (0.79  
|                                                                                                                 |                                                           |                         |        
|Weighted
  average number of shares used in computing basic
       and diluted net loss per share (in thousands) |                                                           |                         | 11,324 
|                                                                                                                 |                                                           |                         |        

The
accompanying notes are an integral part of the consolidated financial
statements.

F - 5

---

---

|OPTIBASE LTD. AND ITS SUBSIDIARIES           
|---------------------------------------------
|                                             
|STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
|                                             
|U.S. dollars in thousands                    

|                                                                                        |  | Ordinary
  shares |     | Additional
  paid-in
  capital |  | Treasury
    shares |         | Deferred
  stock
  compensation |  | Accumulated
  other
  comprehensive
  loss |     | Accumulated
  deficit |  | Total
  comprehensive
  loss |        | Total
  shareholders
  equity | 
|--------------------------------------------------------------------------------------- |  | ----------------- | --- | ------------------------------ |  | ------------------- | ------- | ------------------------------- |  | ------------------------------------------ | --- | --------------------- |  | ---------------------------- | ------ | ------------------------------ | 
|                                                                                        |  |                   |     |                                |  |                     |         |                                 |  |                                            |     |                       |  |                              |        |                                | 
|Balance as of January 1,
  2000                                                         |  | $                 | 370 |                                |  | $                   | 30,199  |                                 |  | $                                          | -   |                       |  | $                            | (183   | )                              | 
|Issuance of shares, net                                                                 |  |                   | 65  |                                |  |                     | 67,233  |                                 |  |                                            | -   |                       |  |                              | -      |                                | 
|Issuance of shares to
  ViewGraphics shareholders (see Note
  13b1), net               |  |                   | 43  |                                |  |                     | 11,640  |                                 |  |                                            | -   |                       |  |                              | -      |                                | 
|Exercise of stock options                                                               |  |                   | 8   |                                |  |                     | 660     |                                 |  |                                            | -   |                       |  |                              | -      |                                | 
|Deferred stock compensation
  related to the acquisition of ViewGraphics                |  |                   | -   |                                |  |                     | 4,794   |                                 |  |                                            | -   |                       |  |                              | (4,794 | )                              | 
|Compensation related to
  issuance of shares that are held in escrow                    |  |                   | -   |                                |  |                     | 981     |                                 |  |                                            | -   |                       |  |                              | (981   | )                              | 
|Amortization of deferred
  stock compensation                                           |  |                   | -   |                                |  |                     | -       |                                 |  |                                            | -   |                       |  |                              | 302    |                                | 
|Amortization of deferred
  stock compensation related to shares that are held in escrow |  |                   | -   |                                |  |                     | -       |                                 |  |                                            | -   |                       |  |                              | 51     |                                | 
|Purchase of treasury shares                                                             |  |                   | *)  |                                |  |                     | -       |                                 |  |                                            | (65 | )                     |  |                              | -      |                                | 
|Other comprehensive loss:                                                               |  |                   |     |                                |  |                     |         |                                 |  |                                            |     |                       |  |                              |        |                                | 
|Unrealized losses on
  available for sale marketable securities                         |  |                   | -   |                                |  |                     | -       |                                 |  |                                            | -   |                       |  |                              | -      |                                | 
|Net loss                                                                                |  |                   | -   |                                |  |                     | -       |                                 |  |                                            | -   |                       |  |                              | -      |                                | 
|                                                                                        |  |                   |     |                                |  |                     |         |                                 |  |                                            |     |                       |  |                              |        |                                | 
|Total comprehensive loss                                                                |  |                   |     |                                |  |                     |         |                                 |  |                                            |     |                       |  |                              |        |                                | 
|                                                                                        |  |                   |     |                                |  |                     |         |                                 |  |                                            |     |                       |  |                              |        |                                | 
|Balance as of December 31,
  2000                                                       |  | $                 | 486 |                                |  | $                   | 115,507 |                                 |  | $                                          | (65 | )                     |  | $                            | (5,605 | )                              | 
|                                                                                        |  |                   |     |                                |  |                     |         |                                 |  |                                            |     |                       |  |                              |        |                                | 
|                                                                                        |  |                   |     |                                |  |                     |         |                                 |  |                                            |     |                       |  |                              |        |                                | 

*)            Represents an amount lower than $ 1.

The accompanying notes are an integral part of the consolidated financial
statements.

F - 6

---

---

|OPTIBASE LTD. AND ITS SUBSIDIARIES           
|---------------------------------------------
|STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
|                                             
|U.S. dollars in thousands                    

|                                                                                                                                                   |  | Ordinary
  shares |     | Additional
  paid-in
  capital |  | Treasury
  shares |         | Deferred
  stock
  compensation |  | Accumulated
  other comprehensive
  income (loss) |        | Accumulated
  deficit |  | Total
  comprehensive
  loss |        | Total
  shareholders
  equity | 
|-------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | --- | ------------------------------ |  | ----------------- | ------- | ------------------------------- |  | ------------------------------------------------- | ------ | --------------------- |  | ---------------------------- | ------ | ------------------------------ | 
|                                                                                                                                                   |  |                   |     |                                |  |                   |         |                                 |  |                                                   |        |                       |  |                              |        |                                | 
|Balance as of January 1,
  2001                                                                                                                    |  | $                 | 486 |                                |  | $                 | 115,507 |                                 |  | $                                                 | (65    | )                     |  | $                            | (5,605 | )                              | 
|Issuance of shares, net                                                                                                                            |  |                   | 4   |                                |  |                   | 438     |                                 |  |                                                   | -      |                       |  |                              | -      |                                | 
|Exercise of stock options                                                                                                                          |  |                   | 5   |                                |  |                   | 697     |                                 |  |                                                   | -      |                       |  |                              | -      |                                | 
|Cancellation of deferred
  stock compensation                                                                                                      |  |                   | -   |                                |  |                   | (290    | )                               |  |                                                   | -      |                       |  |                              | 290    |                                | 
|Cancellation of deferred
  stock compensation related to issuance of shares that are held in escrow                                                |  |                   | -   |                                |  |                   | (403    | )                               |  |                                                   | -      |                       |  |                              | 403    |                                | 
|Amortization of deferred
  stock compensation                                                                                                      |  |                   | -   |                                |  |                   | -       |                                 |  |                                                   | -      |                       |  |                              | 1,911  |                                | 
|Amortization of deferred
  stock compensation related to shares that are held in escrow                                                            |  |                   | -   |                                |  |                   | -       |                                 |  |                                                   | -      |                       |  |                              | 302    |                                | 
|Purchase of treasury shares                                                                                                                        |  |                   | -   |                                |  |                   | -       |                                 |  |                                                   | (1,094 | )                     |  |                              | -      |                                | 
|Receipt of treasury shares
  related to ViewGraphics acquisition (see Note 13b3)                                                                   |  |                   | -   |                                |  |                   | -       |                                 |  |                                                   | (1,119 | )                     |  |                              | -      |                                | 
|Other comprehensive income:                                                                                                                        |  |                   |     |                                |  |                   |         |                                 |  |                                                   |        |                       |  |                              |        |                                | 
|Unrealized loss on
  available-for-sale marketable securities                                                                                      |  |                   | -   |                                |  |                   | -       |                                 |  |                                                   | -      |                       |  |                              | -      |                                | 
|Less - reclassification
  adjustment for other than temporary decrease in value of available-for-sale
  marketable securities included in net loss |  |                   | -   |                                |  |                   | -       |                                 |  |                                                   | -      |                       |  |                              | -      |                                | 
|                                                                                                                                                   |  |                   |     |                                |  |                   |         |                                 |  |                                                   |        |                       |  |                              |        |                                | 
|Other comprehensive income                                                                                                                         |  |                   | -   |                                |  |                   | -       |                                 |  |                                                   | -      |                       |  |                              | -      |                                | 
|Net loss                                                                                                                                           |  |                   | -   |                                |  |                   | -       |                                 |  |                                                   | -      |                       |  |                              | -      |                                | 
|                                                                                                                                                   |  |                   |     |                                |  |                   |         |                                 |  |                                                   |        |                       |  |                              |        |                                | 
|Total comprehensive loss                                                                                                                           |  |                   |     |                                |  |                   |         |                                 |  |                                                   |        |                       |  |                              |        |                                | 
|                                                                                                                                                   |  |                   |     |                                |  |                   |         |                                 |  |                                                   |        |                       |  |                              |        |                                | 
|Balance as of December 31,
  2001                                                                                                                  |  | $                 | 495 |                                |  | $                 | 115,949 |                                 |  | $                                                 | (2,278 | )                     |  | $                            | (2,699 | )                              | 
|                                                                                                                                                   |  |                   |     |                                |  |                   |         |                                 |  |                                                   |        |                       |  |                              |        |                                | 

The
accompanying notes are an integral part of the consolidated financial
statements.

F - 7

---

---

|OPTIBASE LTD. AND ITS SUBSIDIARIES           
|---------------------------------------------
|STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
|                                             
|U.S. dollars in thousands                    

|                                                                                        |  | Ordinaryshares |     | Additional 
  paid-in capital |  | Treasury
  shares |         | Deferred
  stock
  compensation |  | Accumulated
  other
  comprehensive
  income |        | Accumulated
  deficit |  | Total
  comprehensive
  loss |        | Total
  shareholders
  equity | 
|--------------------------------------------------------------------------------------- |  | -------------- | --- | ----------------------------- |  | ----------------- | ------- | ------------------------------- |  | -------------------------------------------- | ------ | --------------------- |  | ---------------------------- | ------ | ------------------------------ | 
|                                                                                        |  |                |     |                               |  |                   |         |                                 |  |                                              |        |                       |  |                              |        |                                | 
|Balance as of January 1,
  2002                                                         |  | $              | 495 |                               |  | $                 | 115,949 |                                 |  | $                                            | (2,278 | )                     |  | $                            | (2,699 | )                              | 
|                                                                                        |  |                |     |                               |  |                   |         |                                 |  |                                              |        |                       |  |                              |        |                                | 
|Issuance of shares, net                                                                 |  |                | 5   |                               |  |                   | 337     |                                 |  |                                              | -      |                       |  |                              | -      |                                | 
|Exercise of stock options                                                               |  |                | 5   |                               |  |                   | 30      |                                 |  |                                              | -      |                       |  |                              | -      |                                | 
|Cancellation of deferred
  stock compensation                                           |  |                | -   |                               |  |                   | (809    | )                               |  |                                              | -      |                       |  |                              | 809    |                                | 
|Amortization of deferred stock compensation                                             |  |                | -   |                               |  |                   | -       |                                 |  |                                              | -      |                       |  |                              | 1,156  |                                | 
|Amortization of deferred stock compensation related to shares
  that are held in escrow |  |                | -   |                               |  |                   | -       |                                 |  |                                              | -      |                       |  |                              | 225    |                                | 
|Other comprehensive income:                                                             |  |                |     |                               |  |                   |         |                                 |  |                                              |        |                       |  |                              |        |                                | 
|Unrealized income on
  available-for-sale marketable securities                         |  |                | -   |                               |  |                   | -       |                                 |  |                                              | -      |                       |  |                              | -      |                                | 
|Net loss                                                                                |  |                | -   |                               |  |                   | -       |                                 |  |                                              | -      |                       |  |                              | -      |                                | 
|                                                                                        |  |                |     |                               |  |                   |         |                                 |  |                                              |        |                       |  |                              |        |                                | 
|Total comprehensive loss                                                                |  |                |     |                               |  |                   |         |                                 |  |                                              |        |                       |  |                              |        |                                | 
|                                                                                        |  |                |     |                               |  |                   |         |                                 |  |                                              |        |                       |  |                              |        |                                | 
|Balance as of December 31,
  2002                                                       |  | $              | 505 |                               |  | $                 | 115,507 |                                 |  | $                                            | (2,278 | )                     |  | $                            | (509   | )                              | 
|                                                                                        |  |                |     |                               |  |                   |         |                                 |  |                                              |        |                       |  |                              |        |                                | 

The
accompanying notes are an integral part of the consolidated financial
statements.

F - 8

---

---

|OPTIBASE LTD. AND ITS SUBSIDIARIES   
|-------------------------------------
|CONSOLIDATED STATEMENTS OF CASH FLOWS
|                                     
|U.S. dollars in thousands            

|                                                         |                                                                                                                     | Year ended December 31, |        
|-------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------- | ----------------------- | -------
|                                                         |                                                                                                                     |                         |        
|                                                         |                                                                                                                     | 2000                    |        
|                                                         |                                                                                                                     |                         |        
|Cash flows from operating
  activities:                  |                                                                                                                     |                         |        
|                                                         | Net loss                                                                                                            |                         | $      
|                                                         | Adjustments required to
  reconcile net loss to net cash provided by (used in)
       operating activities:         |                         |        
|                                                         | Depreciation and
  amortization                                                                                     |                         |        
|                                                         | Impairment of property and
  equipment and capitalized computer softwarecosts  included in restructuring
  charges |                         |        
|                                                         | Impairment of other assets                                                                                          |                         |        
|                                                         | In-process research and
  development write-off                                                                     |                         |        
|                                                         | Equity in losses of
  affiliate                                                                                     |                         |        
|                                                         | Cumulative effect of
  accounting change                                                                            |                         |        
|                                                         | Proceeds from (investment
  in) trading marketable securities, net                                                  |                         |        
|                                                         | Other than temporary
  decrease in value of available-for-sale marketablesecurities                                 |                         |        
|                                                         | Accrued interest and
  amortization of premium and discount on available-for-sale marketable
  securities           |                         |        
|                                                         | Loss (gain) on sale of
  available-for-sale marketable securities                                                   |                         |        
|                                                         | Loss (gain) on sale of
  property and equipment                                                                     |                         |        
|                                                         | Accrued severance pay, net                                                                                          |                         |        
|                                                         | Amortization of deferred
  stock compensation                                                                       |                         |        
|                                                         | Decrease in trade
  receivables                                                                                     |                         |        
|                                                         | Decrease (increase) in
  other accounts receivable and prepaid expenses                                             |                         |        
|                                                         | Decrease (increase) in
  inventories                                                                                |                         |        
|                                                         | Increase (decrease) in
  trade payables                                                                             |                         |        
|                                                         | Increase (decrease) in
  deferred revenues                                                                          |                         |        
|                                                         | Decrease in accrued
  expenses and other accounts payable                                                           |                         |        
|                                                         |                                                                                                                     |                         |        
|Net cash provided by (used
  in) operating activities    |                                                                                                                     |                         | 8,171  
|                                                         |                                                                                                                     |                         |        
|Cash flows from investing
  activities:                  |                                                                                                                     |                         |        
|                                                         | Capitalization of computer
  software costs                                                                         |                         |        
|                                                         | Proceeds from sale of
  property and equipment                                                                      |                         |        
|                                                         | Purchase of property and
  equipment                                                                                |                         |        
|                                                         | Investments in
  available-for-sale marketable securities                                                           |                         |        
|                                                         | Proceeds from sale of
  available-for-sale marketable securities                                                    |                         |        
|                                                         | Proceeds from redemption of
  matured available-for-sale marketable securities                                      |                         |        
|                                                         | Investment in short-term
  bank deposits                                                                            |                         |        
|                                                         | Proceeds from maturity of
  short-term bank deposits                                                                |                         |        
|                                                         | Redemption of (investment
  in) long-term lease deposits                                                            |                         |        
|                                                         | Investment in companies                                                                                             |                         |        
|                                                         | Payment for the acquisition
  of ViewGraphics Inc. (c)                                                              |                         |        
|                                                         | Payment for the acquisition
  of HiTV unit (d)                                                                      |                         |        
|                                                         |                                                                                                                     |                         |        
|Net cash provided by (used
  in) investing activities    |                                                                                                                     |                         | (80,975
|                                                         |                                                                                                                     |                         |        
|Cash flows from financing
  activities:                  |                                                                                                                     |                         |        
|                                                         | Proceeds from issuance of
  Ordinary shares, net                                                                    |                         |        
|                                                         | Proceeds from exercise of
  stock options                                                                           |                         |        
|                                                         | Purchase of treasury shares                                                                                         |                         |        
|                                                         | Payments of shareholders
  loans                                                                                   |                         |        
|                                                         | Payments of long-term
  capital lease obligations                                                                   |                         |        
|                                                         |                                                                                                                     |                         |        
|Net cash provided by (used
  in) financing activities    |                                                                                                                     |                         | 67,886 
|                                                         |                                                                                                                     |                         |        
|Increase (decrease) in cash
  and cash equivalents       |                                                                                                                     |                         | (4,918 
|Cash and cash equivalents
  at the beginning of the year |                                                                                                                     |                         | 10,144 
|                                                         |                                                                                                                     |                         |        
|Cash and cash equivalents
  at the end of the year       |                                                                                                                     | $                       | 5,226  
|                                                         |                                                                                                                     |                         |        
|                                                         |                                                                                                                     |                         |        

The
accompanying notes are an integral part of the consolidated financial
statements.

F - 9

---

---

|OPTIBASE LTD. AND ITS SUBSIDIARIES   
|-------------------------------------
|CONSOLIDATED STATEMENTS OF CASH FLOWS
|U.S. dollars in thousands            

| |  |  | Year ended December 31, | 
| |  |  | ----------------------- | 
| |  |  |                         | 
| |  |  | 2000                    | 
| |  |  |                         | 

|Supplemental disclosure of
  cash flow activities: |  |  |  |  |  |  |  |  |  |  |  |  | 
|-------------------------------------------------- |  |  |  |  |  |  |  |  |  |  |  |  | 

|    |                                                                                                     |                                                                                                          |   |         |      |   |   |         |         |   |   |     |     | 
|--- | --------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------- | - | ------- | ---- | - | - | ------- | ------- | - | - | --- | --- | 
|(a) | Non-cash transactions:                                                                              |                                                                                                          |   |         |      |   |   |         |         |   |   |     |     | 
|    |                                                                                                     | Treasury shares received
  from ViewGraphics Inc. former shareholders                                    |   | $       | -    |   |   | $       | (269    | ) |   | $   | -   | 
|    |                                                                                                     | Share issuance expenses
  payable related to the acquisition of
  ViewGraphics                           |   |         | (130 | ) |   |         | -       |   |   |     | -   | 
|    |                                                                                                     | Reclassification of
  inventories into property and equipment                                            |   |         | 39   |   |   |         | 192     |   |   |     | 575 | 
|    |                                                                                                     | Reclassification of
  available-for-sale marketable securities into trading
       marketable securities |   |         | -    |   |   |         | (13,528 | ) |   |     | -   | 
|    |                                                                                                     |                                                                                                          |   |         |      |   |   |         |         |   |   |     |     | 
|    |                                                                                                     |                                                                                                          | $ | (91     | )    |   | $ | (13,605 | )       |   | $ | 575 |     | 
|    |                                                                                                     |                                                                                                          |   |         |      |   |   |         |         |   |   |     |     | 
|(b) | Cash paid during the year
  for interest                                                            |                                                                                                          | $ | 62      |      |   | $ | 90      |         |   | $ | 40  |     | 
|    |                                                                                                     |                                                                                                          |   |         |      |   |   |         |         |   |   |     |     | 
|    |                                                                                                     |                                                                                                          |   |         |      |   |   |         |         |   |   |     |     | 
|(c) | Payment for the acquisition
  of ViewGraphics (Note 1b):                                            |                                                                                                          |   |         |      |   |   |         |         |   |   |     |     | 
|    |                                                                                                     |                                                                                                          |   |         |      |   |   |         |         |   |   |     |     | 
|    | Fair values of assets
  acquired and liabilities assumed at the date of acquisition are as follows: |                                                                                                          |   |         |      |   |   |         |         |   |   |     |     | 
|    |                                                                                                     |                                                                                                          |   |         |      |   |   |         |         |   |   |     |     | 
|    | Working capital deficiency
  (excluding cash and cash equivalents in the
   amount of $498)         |                                                                                                          | $ | (3,746  | )    |   |   |         |         |   |   |     |     | 
|    | Property and equipment                                                                              |                                                                                                          |   | 1,050   |      |   |   |         |         |   |   |     |     | 
|    | Shareholders loans                                                                                 |                                                                                                          |   | (285    | )    |   |   |         |         |   |   |     |     | 
|    | Long-term deposits                                                                                  |                                                                                                          |   | 17      |      |   |   |         |         |   |   |     |     | 
|    | In-process research and
  development                                                               |                                                                                                          |   | 14,430  |      |   |   |         |         |   |   |     |     | 
|    | Goodwill                                                                                            |                                                                                                          |   | 14,669  |      |   |   |         |         |   |   |     |     | 
|    | Other intangible assets                                                                             |                                                                                                          |   | 17,975  |      |   |   |         |         |   |   |     |     | 
|    | Allowance for acquisition
  expenses                                                                |                                                                                                          |   | (484    | )    |   |   |         |         |   |   |     |     | 
|    |                                                                                                     |                                                                                                          |   |         |      |   |   |         |         |   |   |     |     | 
|    |                                                                                                     |                                                                                                          |   | 43,626  |      |   |   |         |         |   |   |     |     | 
|    | Less - amount acquired by
  issuance of shares                                                      |                                                                                                          |   | (11,813 | )    |   |   |         |         |   |   |     |     | 
|    |                                                                                                     |                                                                                                          |   |         |      |   |   |         |         |   |   |     |     | 
|    |                                                                                                     |                                                                                                          | $ | 31,813  |      |   |   |         |         |   |   |     |     | 
|(d) | Payment for the acquisition
  of HiTV unit (Note 1b):                                               |                                                                                                          |   |         |      |   |   |         |         |   |   |     |     | 
|    |                                                                                                     |                                                                                                          |   |         |      |   |   |         |         |   |   |     |     | 
|    | Fair values of assets
  acquired at the date of acquisition are as follows:                         |                                                                                                          |   |         |      |   |   |         |         |   |   |     |     | 
|    |                                                                                                     |                                                                                                          |   |         |      |   |   |         |         |   |   |     |     | 
|    | Property and equipment                                                                              |                                                                                                          | $ | 770     |      |   |   |         |         |   |   |     |     | 
|    | Assembled workforce                                                                                 |                                                                                                          |   | 259     |      |   |   |         |         |   |   |     |     | 
|    | Patents                                                                                             |                                                                                                          |   | 1,710   |      |   |   |         |         |   |   |     |     | 
|    | Technology                                                                                          |                                                                                                          |   | 1,011   |      |   |   |         |         |   |   |     |     | 
|    |                                                                                                     |                                                                                                          |   |         |      |   |   |         |         |   |   |     |     | 
|    |                                                                                                     |                                                                                                          | $ | 3,750   |      |   |   |         |         |   |   |     |     | 
|    |                                                                                                     |                                                                                                          |   |         |      |   |   |         |         |   |   |     |     | 

The
accompanying notes are an integral part of the consolidated financial
statements.

F - 10

---

---

|OPTIBASE LTD. AND ITS SUBSIDIARIES        
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|U.S. dollars in thousands                 

|NOTE 1:-    GENERAL
|-------------------

| | a. | Optibase
  Ltd. (the Company)  was incorporated and commenced operations in
  1990.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | Optibase has
  three wholly-owned subsidiaries: Optibase Inc. in the United States which was
  incorporated in 1991, Optibase Europe Ltd., in the United Kingdom, which was
  dissolved in July 2002, and Optibase B.V. in the Netherlands, which was
  incorporated during 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | The Company
  and its subsidiaries provide constraints-free streaming of rich media over
  broadband networks and enable interconnectivity between Digital Video
  Broadcasting and IP networks. The Company and its subsidiaries products have
  been deployed in applications such as TV broadcasts over IP networks,
  video-on-demand, corporate communications, distance learning and business TV.                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | The Company
  and its subsidiaries sell their products worldwide through distributors,
  Value Added Resellers (VARs) , system integrators and Original
  Equipment Manufacturers (OEMs) , who are considered end-customers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | Aggregate
  sales to the three leading system integrators accounted for approximately
  30%, 23% and 30% of the consolidated revenues in 2000, 2001 and 2002,
  respectively. Aggregate sales to the three leading distributors accounted for
  approximately 13%, 13% and 14% of the consolidated revenues in 2000, 2001 and
  2002, respectively. See Note 15b for individual major customers.                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | A majority
  of the Company and its subsidiaries sales is made in North America, Europe
  and the Far East (see Note 15a).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | The Company
  and its subsidiaries depend on third parties to distribute and market their
  products. If the Company and its subsidiaries are unable to effectively
  manage and maintain relationships with their system integrators and
  distributors, or to develop new relationships with other system integrators
  and distributors, their ability to market and sell their products in certain
  markets will be affected. Furthermore, a loss of one or more of the Company
  and its subsidiaries major system integrators and/or major distributors, or
  any event negatively effecting such system integrators and/or distributors
  financial condition, could cause a material adverse effect on the Companys and
  its subsidiaries results of operations and financial position.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | The Company
  and its subsidiaries are dependent upon sole source suppliers for certain key
  components used in their products, including certain compression chips.
  Although there are a limited number of manufacturers of the particular
  components, management believes that other suppliers could provide similar
  components on comparable terms. A change in suppliers, however, could cause a
  delay in manufacturing and possible loss of sales, which would adversely
  affect the operating results and financial position.                                                                                                                                                                                                                                                        

F - 11

---

---

|OPTIBASE LTD. AND ITS SUBSIDIARIES        
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|U.S. dollars in thousands                 

|NOTE 1:-    GENERAL (Cont.)
|---------------------------

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| | b. | Acquisitions
  of ViewGraphics, Inc. (ViewGraphics)  and ECI Telecom Ltd. HiTV
  unit (HiTV unit):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 
| | 1. | In December
  2000, the Company acquired all of ViewGraphics outstanding shares and
  substituted all options for an aggregate purchase price of approximately
  $ 43,626, of which $ 11,813 in 1,370,150 newly issued Ordinary shares of
  the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    | Under the
  agreement, 936,421 Ordinary shares were placed in escrow for a period of one
  year as set forth in the agreement to cover against future contingencies. The
  fair value of these escrowed shares was recorded as part of the purchase
  price (see Note 13.b.2). An additional 100,000 shares, which relate to the
  employment of two ViewGraphics executives, were placed into escrow for a
  period of up to 24 months. The fair value of the shares was recorded as
  deferred stock compensation (see Note 13.b.1). The Company also granted
  753,384 options in exchange for the options held by employees of ViewGraphics
  as of the acquisition date. The Company recorded a deferred stock
  compensation in respect for these options (see Note 13d). The operations of
  ViewGraphics are included in the consolidated statements from the date of
  acquisition.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    | Prior to the
  acquisition, ViewGraphics was a provider of hardware and software solutions
  used for the manipulations and transmission of broadcast-quality digital
  video over broadband networks. These solutions are used for applications such
  as interactive TV, video-on-demand and datacasing.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    | The
  acquisition was treated on the basis of the purchase method of accounting in
  accordance with Accounting Principles Board Opinion No. 16 Business
  Combinations (APB 16) . Accordingly, the purchase price has
  been allocated according to the fair value of the assets acquired and
  liabilities assumed at the date of acquisition.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    | Other
  intangible assets acquired had a fair value of $ 47,074 as shown below:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 

| | Technology                                |  | $ | 16,130 |  | 
| | ----------------------------------------- |  | - | ------ |  | 
| | Goodwill                                  |  |   | 14,669 |  | 
| | Assembled
  workforce                     |  |   | 1,000  |  | 
| | Customer
  base                           |  |   | 845    |  | 
| | In process
  research and development (*) |  |   | 14,430 |  | 
| |                                           |  |   |        |  | 
| |                                           |  | $ | 47,074 |  | 
| |                                           |  |   |        |  | 

| |    | (*)                                                                                                                                                                                                                                                                      | Write-off of
  in process research and development, for which technological feasibility has
  not yet been established and no alternative future use exists.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                         
| | 2. | In October
  2000, the Company purchased the HiTV unit, in consideration of $ 3,750,
  which was paid in cash. Prior to the acquisition, the HiTV unit was a
  developer of a carrier-grade networking solution optimized for TV
  distribution networking applications.

F - 12

---

---

|OPTIBASE LTD. AND ITS SUBSIDIARIES        
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|U.S. dollars in thousands                 

|NOTE 1:-    GENERAL (Cont.)
|---------------------------

| |  |                                                                                                                                                                                                                                            
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The
  acquisition was treated on the basis of the purchase method of accounting and
  accordingly, the allocation of the purchase price of HiTV unit is based on
  the fair value of assets acquired at the date of acquisition as follows:
| |  |                                                                                                                                                                                                                                            

| | Property and
  equipment |  | $ | 770   |  | 
| | ------------------------ |  | - | ----- |  | 
| | Assembled
  workforce    |  |   | 259   |  | 
| | Patents                  |  |   | 1,710 |  | 
| | Technology               |  |   | 1,011 |  | 
| |                          |  |   |       |  | 
| |                          |  | $ | 3,750 |  | 
| |                          |  |   |       |  | 

| | c. | Impairment
  of other assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | 1. | Impairment
  of other assets in 2001 (see also Note 2j and 2k):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | In the third
  quarter of 2001, certain conditions were identified by management, including
  recurring operating losses and downward adjustment to the Companys
  projections for 2002, as potential indicators of intangible assets
  impairment. As a result, management conducted an evaluation of the carrying
  value and amortization periods of the intangible assets resulted from
  acquisition of ViewGraphics and HiTV unit. Management considered current and
  anticipated industry conditions, recent changes in its business strategies,
  and current and anticipated operating results.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | According to
  the evaluation, the Company and its subsidiaries recognized an impairment
  loss in the amount of $ 20,933, in accordance with Statement of Financial
  Accounting Standard No. 121 Accounting for the Impairment of Long-Lived
  Assets and for Long-Lived Assets to be Disposed of (SFAS
  121)  and Accounting Principles Board Opinion No. 17  Intangible Assets (APB
  17) , which is composed as follows:                                                                                                                                                                    

| | Acquired technology (1) |  | $ | 5,160  |  | 
| | ----------------------- |  | - | ------ |  | 
| | Acquired technology (2) |  |   | 813    |  | 
| | Goodwill (1)            |  |   | 12,872 |  | 
| | Patents (2)             |  |   | 1,397  |  | 
| | Customer base (1)       |  |   | 688    |  | 
| | Assembled workforce (1) |  |   | 3      |  | 
| |                         |  |   |        |  | 
| |                         |  | $ | 20,933 |  | 
| |                         |  |   |        |  | 

| |  | (1)                                                                                                  | Related to
  the purchase of ViewGraphics, and based on an independent valuation, as of
  September 30, 2001.
| |  | ---------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------
| |  |                                                                                                      |                                                                                                              
| |  | (2)                                                                                                  | Related to
  the purchase of HiTV unit and based on an independent valuation, as of
  September 30, 2001.    
| |  |                                                                                                      |                                                                                                              
| |  | The
  impairment charge is reflected as impairment of other assets in the
  financial    statements.

F - 13

---

---

|OPTIBASE LTD. AND ITS SUBSIDIARIES        
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|U.S. dollars in thousands                 

|NOTE 1:-    GENERAL (Cont.)
|---------------------------

| |   
| | --
| | 2.
| |   
| |   
| |   
| |   
| |   
| | 3.
| |   
| |   
| |   
| |   
| |   

| | Customer base - ViewGraphics       |  | $ | 66  |  | 
| | ---------------------------------- |  | - | --- |  | 
| | Assembled workforce - ViewGraphics |  |   | 636 |  | 
| | Assembled workforce - HiTV         |  |   | 152 |  | 
| |                                    |  |   |     |  | 
| |                                    |  | $ | 854 |  | 
| |                                    |  |   |     |  | 

F - 14

---

---

|OPTIBASE LTD. AND ITS SUBSIDIARIES        
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|U.S. dollars in thousands                 

|NOTE 1:-    GENERAL (Cont.)
|---------------------------

| | 
| | 
| | 
| | 

| |                                          |                                                 | Year ended December
  31, |       
| | ---------------------------------------- | ----------------------------------------------- | ------------------------- | ------
| |                                          |                                                 |                           |       
| |                                          |                                                 | 2000                      |       
| |                                          |                                                 |                           |       
| |                                          |                                                 |                           |       
| | Reported
  net loss                      |                                                 | $                         | (8,962
| | Cumulative
  effect of accounting change |                                                 |                           | -     
| | Goodwill
  amortization                  |                                                 |                           | 211   
| |                                          |                                                 |                           |       
| | Adjusted
  net loss                      |                                                 | $                         | (8,751
| |                                          |                                                 |                           |       
| |                                          |                                                 |                           |       
| | Basic and diluted net loss-per-share:    |                                                 |                           |       
| |                                          | Reported
  net loss                             |                           | $     
| |                                          | Cumulative
  effect of accounting 
    change   |                           |       
| |                                          | Goodwill
  amortization                         |                           |       
| |                                          |                                                 |                           |       
| |                                          | Adjusted
  basic and diluted net loss-per-share |                           | $     
| |                                          |                                                 |                           |       

| | d. | Restructuring
  in 2002:                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | During the
  third quarter of 2002, and with respect to the conditions that led to the
  abovementioned impairment of intangible assets, the Company announced that it
  was implementing a restructuring plan (the Plan)  intended to
  further reduce costs. The Plan consisted of employee termination benefits
  associated with the involuntary termination of 10 employees. Through the
  third quarter of 2002, the Plan and the benefit arrangement were communicated
  to employees.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | The
  following table summarizes the restructuring accruals status as of December
  31, 2002:                                                                                                                                                                                                                                                                                                                                                                                                  

| |                                                       |  | Restructuring
  charge |      | Utilized |          | Balance at
  December 31,
  2002 |    
| | ----------------------------------------------------- |  | ---------------------- | ---- | -------- | -------- | -------------------------------- | ---
| |                                                       |  |                        |      |         
| |                                                       |  |                        |      |         
| |                                                       |  |                        |      |          |         
| |                                                       |  |                        | Cash |          | Non-cash |                                  |    
| |                                                       |  |                        |      |          |          |                                  |    
| | Employee termination benefits and 
     related costs |  | $                      | 186  |          |          | $                                | 135
| | Impairment of property and 
     equipment            |  |                        | 319  |          |          |                                  | -  
| |                                                       |  |                        |      |          |          |                                  |    
| |                                                       |  | $                      | 505  |          |          | $                                | 135
| |                                                       |  |                        |      |          |          |                                  |    

F - 15

---

---

|OPTIBASE LTD. AND ITS SUBSIDIARIES        
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|U.S. dollars in thousands                 

|NOTE 1:-    GENERAL (Cont.)
|---------------------------

| | 
| | 
| | 
| | 
| | 

|NOTE 2:-    SIGNIFICANT ACCOUNTING POLICIES
|-------------------------------------------

| |                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The consolidated financial statements have
  been prepared in accordance with generally accepted accounting principles in
  the United States (U.S. GAAP) .
| |                                                                                                                                                              
| | a.                                                                                                                                                           
| |                                                                                                                                                              
| |                                                                                                                                                              
| |                                                                                                                                                              
| | b.                                                                                                                                                           
| |                                                                                                                                                              
| |                                                                                                                                                              
| |                                                                                                                                                              
| | c.                                                                                                                                                           
| |                                                                                                                                                              
| |                                                                                                                                                              
| |                                                                                                                                                              
| | d.                                                                                                                                                           
| |                                                                                                                                                              
| |                                                                                                                                                              

F - 16

---

---

|OPTIBASE LTD. AND ITS SUBSIDIARIES        
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|U.S. dollars in thousands                 

|NOTE 2:-    SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|---------------------------------------------------

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | e. | Short-term
  bank deposits:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | Bank
  deposits with maturities of more than three months, but less than one year,
  are included in short-term bank deposits and presented at cost. All of the
  short-term bank deposits are in U.S. dollars.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | f. | Marketable
  securities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | The Company
  accounts for its investments in marketable securities in accordance with
  Statement of Financial Accounting Standard No. 115, Accounting for
  Certain Investments in Debt and Equity Securities (SFAS
  115) . Management determines the appropriate classification of its
  investments in marketable debt at the time of purchase, and reevaluates such
  determinations at each balance sheet date.                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | As of
  December 31, 2002, all marketable securities covered by SFAS 115 were
  classified as available-for-sale. Available-for-sale marketable securities
  are stated at fair value, with unrealized gains and losses reported in a
  separate component of shareholders equity, Accumulated other
  comprehensive loss. Realized gains and losses on sales of investments,
  as determined on a specific identification basis, and interest income,
  including amortization of the premium and discount on debt securities, are
  included in the consolidated statement of operations, as financial income or
  expense as appropriate (see Note 17b).                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | During 2001,
  the Company reclassified into the trading category some of its then-existing
  available-for-sale marketable securities, and classified into the trading
  category some newly purchased debt securities. As such, as of December 31,
  2001 all marketable securities were classified as available-for-sale or
  trading. Trading securities are held for resale in anticipation of short-term
  market movements. Under SFAS 115, marketable securities classified as
  trading securities are stated according to the quoted market prices as of
  each balance sheet date. Gains and losses (realized and unrealized) related
  to trading securities as well as interest on such securities are included as
  financial income or expenses as appropriate (see Note 3 and 17b).
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | According to
  the Staff Accounting Bulletin No. 59 (SAB 59) , management is
  required to evaluate each period whether the decline in value for securities
  is other than temporary. Under SAB 59 fair value below cost for two
  consecutive quarters considered to be other than a temporary impairment. As
  such, in 2001, the securities decline in value, which is considered other
  than temporary, of some of its available-for-sale securities is in the amount
  of $ 1,791, and recorded in the statement of operations as financial expenses
  (see Note 3 and 17b).                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | g. | Inventories:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | Inventories are stated at the lower of cost
  or market value. Inventory write-offs are provided to cover risks arising
  from slow-moving items or technological obsolescence. In 2001 and 2002 the
  Company and its subsidiaries recorded write-off expenses in a total amount of
  $ 415 and $ 608, respectively, of obsolete inventory and slow-moving
  items, which are included in the statement of operations under cost of
  revenues.                                                                                                                                                                                                                                                                                                                                                   

F - 17

---

---

|OPTIBASE LTD. AND ITS SUBSIDIARIES        
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|U.S. dollars in thousands                 

|NOTE 2:-    SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|---------------------------------------------------

| |    |                                                                                                                                       
| | -- | --------------------------------------------------------------------------------------------------------------------------------------
| |    | Cost is determined as follows:                                                                                                        
| |    |                                                                                                                                       
| |    | Raw
  materials and components - by the average cost method.                                                                        
| |    |                                                                                                                                       
| |    | Work in
  progress and finished goods - on the basis of calculated manufacturing costs
  and related overhead.                        
| |    |                                                                                                                                       
| | h. | Property and
  equipment:                                                                                                             
| |    |                                                                                                                                       
| |    | Property and
  equipment is stated at cost net of accumulated depreciation.                                                           
| |    |                                                                                                                                       
| |    | Depreciation
  is computed by the straight-line method over the estimated useful lives of
  the assets, at the following annual rates:

| |                                      |  |  | %                          | 
| | ------------------------------------ |  |  | -------------------------- | 
| |                                      |  |  |                            | 
| | Computers
  and peripheral equipment |  |  | 20 - 33                    | 
| | Office
  furniture and equipment     |  |  | 6 - 20                     | 
| | Motor
  vehicles                     |  |  | 15                         | 
| | Leasehold
  improvements             |  |  | Over the term of the lease | 

| |    | In 2001 and
  2002, as part of the restructuring plans, the Company and its subsidiaries
  recognized an impairment loss in the amount of $ 588 and $ 319,
  respectively, (see Notes 1d, 2k and 14).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | i. | Goodwill:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    | Goodwill
  represents excess of the costs over the net assets of businesses acquired.
  Goodwill arose from acquisitions prior July 1, 2001, was amortized until
  December 31, 2001, on a straight-line basis over the estimated useful life,
  which was eight years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    | In 2001, the
  Company and its subsidiaries periodically assessed the recoverability of the
  carrying amount of goodwill in accordance with SFAS 121 and APB 17.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    | Subsequent
  January 1, 2002, SFAS 142 requires goodwill to be tested for impairment upon
  adoption and at least annually thereafter or between annual tests in certain
  circumstances, and written down when impaired, rather than being amortized as
  previous accounting standards required. Goodwill attributable to the
  reporting unit is tested for impairment by comparing the fair value of each
  reporting unit with its carrying value. Fair value is determined using
  discounted cash flows and market capitalization. Significant estimates used
  in the methodologies include estimates of future cash flows, future
  short-term and long-term growth rates and weighted average cost of capital
  for the reportable unit. As for goodwill impairments in 2001 and 2002, see
  Notes 1c1 and 1c3, respectively.

F - 18

---

---

|OPTIBASE LTD. AND ITS SUBSIDIARIES        
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|U.S. dollars in thousands                 

|NOTE 2:-    SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|---------------------------------------------------

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | j. | Other assets,
  net:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | Intangible
  assets including assembled workforce, acquired technology, patents and
  customer base subject to amortization arose from acquisition prior July 1,
  2001, are being amortized on a straight-line method over their useful lives,
  which are three, five, five and eight years, respectively in accordance with APB 17.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | As for
  impairments, see Notes 1c1, 1c2 and 2k.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | k. | Impairment
  of long-lived assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | In 2001, the
  Company and its subsidiaries periodically assessed the recoverability of the
  carrying amount of long-lived assets and provide for any possible impairment
  loss based upon the difference between the carrying amount and fair value of
  such assets in accordance with SFAS 121 and APB 17.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | Subsequent
  to January 1, 2002, the Company and its subsidiaries long-lived assets are
  reviewed for impairment in accordance with SFAS 144 whenever events or
  changes in circumstances indicate that the carrying amount of an asset may
  not be recoverable. Recoverability of assets to be held and used is measured
  by a comparison of the carrying amount of an asset to the future undiscounted
  cash flows expected to be generated by the asset. If such assets are
  considered to be impaired, the impairment to be recognized is measured by the
  amount by which the carrying amount of the assets exceeds the fair value of
  the assets. Assets to be disposed of are reported at the lower of the
  carrying amount or fair value less costs to sell.                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | l. | Investment
  in companies:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | Investment
  in companies represents investments in: (i) Preferred shares of a privately
  held company which is recorded at the lower of cost or estimated fair value,
  since the Company does not have the ability to exercise significant influence
  over operating and financial policies of the investee and holds an equity
  stake of less than 20%, (ii) a privately held company by a way of convertible
  loans. The investment is accounted for under the hypothetical liquidation
  method, since the Company has the ability to exercise significant influence
  over operating and financial policies of the investee. The Company applies
  Emergency Issue Task Force No. 99-10, Percentage Used to Determine
  the Amount of Equity Method Losses (EITF 99-10) .
  Accordingly, losses of the investee are first ascribed to the Ordinary shares
  investors up to their investment amount and recognized based only on the
  ownership level of the particular investee security held by the investor. As
  of December 31, 2002, equity in losses of an affiliate was $ 325, and (iii)
  Common stock of a public company which is recorded at fair value, in
  accordance with SFAS 115.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | The
  Companys investments in other companies are reviewed for impairment whenever
  events or changes in circumstances indicate that the carrying amount of an investment
  may not be recoverable, in accordance with Accounting Principles Board
  Opinion No. 18 The Equity Method of Accounting for Investments in
  Common Stock, (APB 18) . As of December 31, 2002, based on
  managements most recent analyses, no impairment losses have been identified
  (see also Notes 6 and 18).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

F - 19

---

---

|OPTIBASE LTD. AND ITS SUBSIDIARIES        
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|U.S. dollars in thousands                 

|NOTE 2:-    SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|---------------------------------------------------

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | m. | Revenue
  recognition:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | The Company
  and its subsidiaries generate revenues mainly from the sale of hardware
  products (products)  and also from an insignificant scope of sale
  of software products. The Company and its subsidiaries sell their products
  worldwide through distributors and OEMs who are considered end-customers.                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | Revenues from product sales are recognized
  in accordance with Staff Accounting Bulletin No. 101, Revenue
  Recognition in Financial Statements (SAB 101) , when
  persuasive evidence of an agreement exists, delivery of the product has
  occurred, the fee is fixed or determinable and collectibility is probable.
  Upon delivery, titles and risks are transferred to the customer and no
  significant obligations exist after delivery has occurred. Estimated warranty
  costs, which are insignificant, are based on the Companys past experience
  and are accrued in the financial statements. The Company and its subsidiaries
  do not grant a right of return.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | Revenues from software sales, which are
  insignificant, are recognized according to Statement Of Position No. 97-2,
  Software Revenue Recognition (SOP 97-2)  (as amended).
  Therefore, revenues from software sales are recognized when delivery has
  occurred, persuasive evidence of an arrangement exists, the vendors fee is
  fixed or determinable and collectibility is probable. Upon delivery, titles
  and risks are transferred to the customer and no significant obligations
  exist after delivery has occurred.                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | Amounts received from customers for which
  revenue has not yet been recognized, are presented as deferred revenues.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | n. | Research and
  development costs:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | Research and development costs incurred in
  the process of developing product improvements or new products, are generally
  charged to expenses as incurred, net of participation of the Office of the
  Chief Scientist in the Israeli Ministry of Industry and Trade and the
  European Union Research and Development Program.                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | Statement of Financial Accounting Standard
  No. 86 Accounting for the Costs of Computer Software to be Sold, Leased
  or Otherwise Marketed, (SFAS 86)  requires capitalization of
  certain software development costs subsequent to the establishment of
  technological feasibility. Based on the Company product development process,
  technological feasibility is established upon completion of a working model.                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | Costs incurred by the Company between
  completion of the working model and the point at which the product is ready
  for general release, have been capitalized.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | Capitalized
  software costs are amortized by the greater of the amount calculated using
  the: (i) ratio that current gross revenues from sales of the software to the
  total of current and anticipated future gross revenues from sales of that
  software, or (ii) the straight-line method over the estimated useful life of
  the product (three years).                                                                                                                                                                                                                                                                                                                     

F - 20

---

---



|                                           | OPTIBASE LTD. AND ITS SUBSIDIARIES
|------------------------------------------ | ----------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in
  thousands               
|                                           |                                   

|NOTE 2:-    SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|---------------------------------------------------

| |   
| | --
| |   
| |   
| | o.
| |   
| |   
| |   
| | p.
| |   
| |   
| |   
| | q.
| |   
| |   
| |   
| | r.
| |   
| |   
| |   
| |   

F - 21

---

---

|                                           | OPTIBASE LTD. AND ITS SUBSIDIARIES
|------------------------------------------ | ----------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in
  thousands               
|                                          

|NOTE 2:-    SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|---------------------------------------------------

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | Investments in marketable securities are
  done via major investment banks in the United States. These investments
  include corporate bonds and shares of a mutual fund. Management believes that
  the financial institutions are financially sound, the portfolio is well
  diversified, and accordingly minimal credit risk exists with respect to these
  marketable securities, all in accordance with the Companys investment
  policy.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | The trade receivables of the Company and
  its subsidiaries are geographically diversified and derived from sales to
  customers mainly in North America, Europe and the Far East. The Company and
  its subsidiaries generally do not require collateral; however, in certain
  circumstances, the Company and its subsidiaries may require letters of
  credit, advanced payments, insurance, other collateral or additional
  guarantees. An allowance for doubtful accounts is determined with respect to
  those amounts that the Company and its subsidiaries have determined to be
  doubtful of collection in addition to a general allowance of approximately 2%
  for the remaining accounts. The Company and its subsidiaries perform ongoing
  credit evaluations of their customers. The allowance for doubtful accounts is
  mainly composed of specific debts that are doubtful of collection amounting
  to $ 739 and $ 814 as of December 31, 2001 and 2002, respectively.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | The Company
  and its subsidiaries have no significant off-balance sheet concentration of
  credit risk such as foreign exchange contracts, option contracts or other
  foreign currency hedging arrangements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | s. | Basic and
  diluted net loss per share:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | Basic net earnings (loss) per share are
  computed based on the weighted average number of Ordinary shares outstanding
  during each year. Diluted net earnings per share are computed based on the
  weighted average number of Ordinary shares outstanding during each year, plus
  the dilutive potential equivalent Ordinary shares considered outstanding
  during the year, in accordance with Statement of Financial Accounting
  Standard No. 128, Earnings Per Share (SFAS 128).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | The total weighted average number of shares
  related to the outstanding options and warrants, excluded from the
  calculations of diluted net loss per share because these securities are
  anti-dilutive was 270,041 for the year ended December 31, 2000, 152,136 for
  the year ended December 31, 2001 and 4,780 for the year ended December 31,
  2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | t. | Accounting for
  stock-based compensation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | The Company has elected to follow
  Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
  Employees (APB 25) and FASB Interpretation No. 44, Accounting for certain
  Transactions Involving Stock Compensation (FIN 44), in accounting for its
  employee stock option plans. Under APB No. 25, when the exercise price of the
  Companys employee stock options is less than the market price of the
  underlying stock on the date of grant, compensation expense is recognized.                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

F - 22

---

---

|                                           | OPTIBASE LTD. AND ITS SUBSIDIARIES
|------------------------------------------ | ----------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in
  thousands               
|                                          

|NOTE 2:-    SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|---------------------------------------------------

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In December
  2002, the FASB issued Statement of Financial Accounting Standard No. 148,
  Accounting for Stock Based Compensation Transmission and Disclosure - an
  amendment of FASB Statement No. 123 (SFAS 148). SFAS 148 permits two
  additional transition methods for entities that adopt the fair value based
  method of accounting for stock-based employee compensation. The statement
  also requires that those effects be disclosed more prominently by specifying
  the form, content, and location of those disclosures. The transition guidance
  and annual disclosure provisions of SFAS 148 are effective for fiscal years
  ending after December 15, 2002, with earlier application permitted in certain
  circumstances. The interim disclosure provisions are effective for financial
  reports containing financial statements for interim periods beginning after
  December 15, 2002. As at the balance sheet date, the Company continues to
  apply APB 25 (see also Note 13d).
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Under
  Statement of Financial Accounting Standard No. 123 Accounting for
  Stock-Based Compensation (SFAS 123), pro forma information regarding net loss and net loss per
  share is required, and has been determined, as if the Company has accounted
  for its employee options under the fair value method prescribed by that
  statement. The fair value for these options was estimated at the date of the
  grant using the Black-Scholes option pricing model, with the following
  weighted-average assumptions for 2000, 2001 and 2002: risk-free interest
  rates of 6.5%, 4% and 3.7% dividend yields of 0%, for each year, volatility
  factors of the expected market price of the Companys Ordinary shares of
  1.249, 0.697 and 0.494, respectively, and a weighted average expected life of
  the options of seven years, for each year.                                                                                                                                                 
| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | Pro forma
  information under SFAS No. 123:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

| |                                                                  |  | Year ended
  December 31, |        
| | ---------------------------------------------------------------- |  | ------------------------- | -------
| |                                                                  |  |                           |        
| |                                                                  |  | 2000                      |        
| |                                                                  |  |                           |        
| | Net loss - as reported                                           |  | $                         | (8,962 
| | Less - stock-based employee
  compensation
    - intrinsic value |  |                           | 302    
| | Add - stock-based employee
  compensation 
    - fair value      |  |                           | (6,760 
| |                                                                  |  |                           |        
| | Net loss - pro forma                                             |  | $                         | (15,420
| |                                                                  |  |                           |        
| | Basic and diluted net loss per share - as 
      reported        |  | $                         | (0.79  
| |                                                                  |  |                           |        
| | Basic and diluted net loss per share - pro 
      forma          |  | $                         | (1.36  
| |                                                                  |  |                           |        

| |  | The Company
  applies SFAS 123 and Emergency Issue Task Force No. 96-18 Accounting for
  Equity Instruments that are Issued to Other than Employees for Acquiring, or
  in Conjunction with Selling, Goods or Services (EITF 96-18) with respect
  to options issued to non-employees. SFAS 123 requires use of an option
  valuation model to measure the fair value of these options at the grant date.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 23

---

---

|                                           | OPTIBASE LTD. AND ITS SUBSIDIARIES
|------------------------------------------ | ----------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in
  thousands               
|                                          

|NOTE 2:-    SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|---------------------------------------------------

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | u. | Severance pay:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | The Companys liability for severance pay
  is calculated pursuant to Israels severance pay law, based on the most
  recent salary of the employees, multiplied by the number of years of
  employment as of balance sheet date. Israeli employees are entitled to
  severance equal to one months salary for each year of employment, or a
  portion thereof. In the event of decrease in an employee salary, severance
  pay is calculated as follows: the severance pay with respect to the period
  prior to the decrease is based on the most recent salary of the employee
  prior to such decrease multiplied by the number of years of the employment
  until the date of the decrease. The severance pay with respect to the period
  following such decrease is based on the actual recent salary of such employee
  multiplied by the number of years of employment following such decrease.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | The Companys liability is fully provided
  by monthly deposits with severance pay funds, insurance policies and by an
  accrual. The value of these funds and policies are recorded as an asset in
  the Companys balance sheet.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | The deposited funds include profits
  accumulated up to the balance sheet date. The deposited funds may be
  withdrawn only upon the fulfillment of the obligation, pursuant to the
  severance pay law or labor agreements. The value of the deposited funds is
  based on the cash surrendered value of these policies, and includes
  immaterial profits.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | Severance pay expenses amounted to
  $ 604, $ 625 and $ 395 for the years ended December 31,
  2000, 2001 and 2002, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | v. | Employee
  benefit plan:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | The Company
  has a 401(K) defined contribution plan covering certain employees in the U.S.
  All eligible employees may elect to contribute up to 15%, but no greater than
  $ 11 per year, of their annual compensation to the plan through salary
  deferrals, subject to IRS limits. The Company made matching contribution up
  to 25% over a vesting period of 5 years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | x. | Fair value of financial instruments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | The
  following methods and assumptions were used by the Company and its
  subsidiaries in estimating their fair value disclosures for financial
  instruments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | The carrying
  amounts of cash and cash equivalents, trade receivables, shareholders loan
  and trade payables approximate their fair value due to the short-term
  maturity of such instruments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | The fair
  value of marketable securities is based on quoted market prices (see Note 3).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | The carrying
  amount of long-term lease deposits and long-term capital lease obligations is
  estimated by discounting the future cash flows using the current interest
  rate for deposits and obligations of similar terms and maturities. The
  carrying amount of the long-term lease deposits and the long-term capital
  lease obligations approximates their fair value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

F - 24

---

---

|                                           | OPTIBASE LTD. AND ITS SUBSIDIARIES
|------------------------------------------ | ----------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in
  thousands               
|                                          

|NOTE 2:-    SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|---------------------------------------------------

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | y. | Impact of recently
  issued accounting standards:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    | In June
  2002, the FASB issues Statement of Financial Accounting Standard No. 146,
  Accounting for Costs Associated with Exit or Disposal Activities (SFAS
  146), which addresses significant issue regarding the recognition,
  measurement, and reporting of costs associated with exit and disposal
  activities, including restructuring activities. SFAS 146 requires that costs
  associated with exit or disposal activities be recognized when they are
  incurred rather than at the date of a commitment to an exit or disposal plan.
  SFAS 146 is effective for all exit or disposal activities initiated after
  December 31, 2002. The Company does not expect the adoption of SFAS 146 to
  have a material impact on its results of operations or financial position.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    | In January
  2003, the FASB issued Interpretation No. 46, Consolidation of Variable
  Interest Entities (FIN 46). The objective of FIN 46 is to improve
  financial reporting by companies involved with variable interest entities. A
  variable interest entity is a corporation, partnership, trust, or any other
  legal structure used for business purposes that either (a) does not have
  equity investors with voting rights or (b) has equity investors that do not
  provide sufficient financial resources for the entity to support its
  activities. FIN 46 requires a variable interest entity to be consolidated by
  a company if that company is subject to a majority of the risk of loss from
  the variable interest entitys activities or entitled to receive a majority
  of the entitys residual returns or both. FIN 46 also requires disclosures
  about variable interest entities that the company is not required to
  consolidate but in which it has a significant variable interest. The
  consolidation requirements of FIN 46 apply immediately to variable interest
  entities created after January 31, 2003. The consolidation requirements apply
  to older entities in the first fiscal year or interim period beginning after
  June 15, 2003. Certain of the disclosure requirements apply in all financial
  statements issued after January 31, 2003, regardless of when the variable
  interest entity was established. As of December 31, 2002, the Company does
  not expect the adoption of FIN 46 to have a material impact on its
  consolidated financial statements.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

|NOTE 3:-    MARKETABLE SECURITIES
|---------------------------------

| |                                             |  | December 31, |       
| | ------------------------------------------- |  | ------------ | ------
| |                                             |  |              |       
| |                                             |  | 2001         |       
| |                                             |  |              |       
| | Available-for-sale securities:              |  |              |       
| | Amortized cost
  (short-term and long-term) |  | $            | 15,994
| | Gross unrealized gains                      |  |              | 78    
| |                                             |  |              |       
| | Fair value of available-for-sale securities |  |              | 16,072
| | Fair value of trading securities            |  |              | 23,260
| |                                             |  |              |       
| | Total fair value of
  marketable securities |  | $            | 39,332
| |                                             |  |              |       
| |                                             |  |              |       

| | All
  available-for-sale securities are corporate bonds in 2001 and 2002.                                                       
| | --------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                 
| | All trading securities in 2001 were shares of a mutual fund issued by
  an investment bank in the U.S. and U.S. corporate bonds.

F - 25

---

---

|                                           | OPTIBASE LTD. AND ITS SUBSIDIARIES
|------------------------------------------ | ----------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in
  thousands               
|                                          

|NOTE 3:-    MARKETABLE SECURITIES (Cont.)
|-----------------------------------------

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| | During 2001, the Companys management determined that the declines in
  the fair value of the Companys investment in the shares of the mutual fund
  are other than temporary. As such, the cost basis of these securities was
  written down to fair value as a new cost basis, and the Company recognized a
  related loss in the amount of $ 1,791 in its statement of operations.
  Thereafter, the Company reclassified its investment in the shares of the
  mutual fund from available-for-sale securities to trading securities. Also,
  during 2001 the Company classified some newly purchased U.S. corporate bonds
  as trading securities. As of December 31, 2002, the Company classified all
  the marketable securities as available-for-sale securities.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | 
| | Realized gains (losses) on sales of available-for-sale securities
  totaled $ (6), $ 5 and $ 852 in 2000, 2001, and 2002, respectively. The
  net adjustment to unrealized holding gains (losses) on available-for-sale
  securities, included as a separate component of shareholders equity -
  Accumulated other comprehensive gains (losses), amounted to $ 675,
  $ (990) and $ 389 in 2000, 2001 and 2002, respectively. The Company
  recorded proceeds from sales of these securities in the amount of
  $ 28,788, $ 1,871 and $ 29,184 in 2000, 2001 and 2002,
  respectively.                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | 
| | The Company recorded losses of $ 0, $ 0 and $ 359 on
  trading securities in 2000, 2001 and 2002, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

| |                                |                            | December 31, 2002 |       
| | ------------------------------ | -------------------------- | ----------------- | ------
| |                                |                            |                   |       
| |                                |                            | Amortized 
  cost |       
| |                                |                            |                   |       
| | Available-for-sale securities: |                            |                   |       
| |                                | Matures in one year        |                   | $     
| |                                | Matures from 1 to 5 years  |                   |       
| |                                | Matures from 5 to 10 years |                   |       
| |                                |                            |                   |       
| | Total                          |                            | $                 | 38,851
| |                                |                            |                   |       

|NOTE 4:-    OTHER ACCOUNTS RECEIVABLE PREPAID EXPENSES
|------------------------------------------------------

| |                        |  | December 31, |      
| | ---------------------- |  | ------------ | -----
| |                        |  |              |      
| |                        |  | 2001         |      
| |                        |  |              |      
| | Employees              |  | $            | 105  
| | Government authorities |  |              | 448  
| | Prepaid expenses       |  |              | 240  
| | Interest receivable    |  |              | 557  
| | Others                 |  |              | 64   
| |                        |  |              |      
| |                        |  | $            | 1,414
| |                        |  |              |      
| |                        |  |              |      

F - 26

---

---

|                                           |  | OPTIBASE LTD. AND ITS SUBSIDIARIES
|------------------------------------------ |  | ----------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in
  thousands               
|                                           |  |                                   

|NOTE 5:-    INVENTORIES
|-----------------------

| |                              |  | December 31, |      
| | ---------------------------- |  | ------------ | -----
| |                              |  |              |      
| |                              |  | 2001         |      
| |                              |  |              |      
| | Raw materials and components |  | $            | 2,557
| | Work in progress             |  |              | 909  
| | Finished goods               |  |              | 2,102
| |                              |  |              |      
| |                              |  | $            | 5,568
| |                              |  |              |      

| | See also
  Note 2g.
| | -------------------

|NOTE 6:-    INVESTMENT IN COMPANIES
|-----------------------------------

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In November
  2000, the Company signed an agreement with a privately held company, Mobixell
  Network, Inc. (Mobixell), according to which the Company has licensed
  Mobixell to use certain of its technologies valued at $ 300, based on an
  estimate made by management, and committed to invest through one of its
  subsidiaries at least $1,000 in Mobixells first round of financing. In
  December 2000, Mobixell completed its first financing round, in which the
  Company, through its subsidiary invested $1,064. As a result, the Company and
  its subsidiary received Series A Preferred shares of Mobixell representing a
  10.90% equity stake, on a fully diluted basis. The investment is treated on
  the basis of the cost method (see also Notes 2l and 18b).                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | In July
  2001, the Company, through Optibase B.V., invested $ 250 in a privately held
  company, V.Box Communication Ltd. (V. Box). The investment was made by way
  of a loan against a note that can be converted into Ordinary shares of V.
  Box, at any time, by a five-day prior written notice. The principal amount of
  the loan should be payable upon the earlier of: (i) July 1, 2010; (ii) actual
  liquidation of V. Box; or (iii) mutual consent of the Company and the other
  investor of V. Box. The loan does not bear interest. In 2002, the Company
  invested additional $ 699 in V. Box in respect for additional
  convertible notes, as described above. In case of conversion, the Company
  will hold approximately 33% of V. Box Ordinary shares. The investment is
  treated in accordance with the equity method (see also Notes 2l and 18a).
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | In December
  2002, the Company purchased 319,000 shares of Common stock of a public
  company, which reflect approximately 0.5%, in the aggregate amount of
  $ 247. The Company views this investment as long-term strategic
  investment. The carrying amount and the fair value of these shares amounted
  to $ 247 as of December 31, 2002 (see also Note 2l).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

F - 27

---

---

|                                           |  | OPTIBASE LTD. AND ITS SUBSIDIARIES
|------------------------------------------ |  | ----------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in
  thousands               
|                                           |  |                                   

|NOTE 7:-    PROPERTY AND EQUIPMENT, NET
|---------------------------------------

| |                                    |  | December 31, |      
| | ---------------------------------- |  | ------------ | -----
| |                                    |  |              |      
| |                                    |  | 2001         |      
| |                                    |  |              |      
| | Cost:                              |  |              |      
| | Computers and peripheral equipment |  | $            | 7,352
| | Office furniture and equipment     |  |              | 587  
| | Motor vehicles                     |  |              | 104  
| | Leasehold improvements             |  |              | 1,295
| |                                    |  |              |      
| |                                    |  |              | 9,338
| |                                    |  |              |      
| | Accumulated depreciation           |  |              | 6,294
| |                                    |  |              |      
| | Depreciated cost                   |  | $            | 3,044
| |                                    |  |              |      

| | As for
  charges, see Note 11d.                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                   
| | Depreciation
  expenses amounted to $ 922, $ 893 and $ 1,576 for the years ended December
  31, 2000, 2001 and 2002, respectively.
| |                                                                                                                                   
| | As for
  impairment charges in 2001 and 2002, see Note 1d and Note 14.                                                            
| |                                                                                                                                   

|NOTE 8:-    OTHER ASSETS, NET
|-----------------------------

| |                           |                                     | December 31, |       
| | ------------------------- | ----------------------------------- | ------------ | ------
| |                           |                                     |              |       
| |                           |                                     | 2001         |       
| |                           |                                     |              |       
| | Intangible assets:        |                                     |              |       
| |                           | Original amounts:                   |              |       
| |                           | Capitalized computer software costs |              | $     
| |                           | Assembled workforce                 |              |       
| |                           | Customer base                       |              |       
| |                           | Acquired technology                 |              |       
| |                           |                                     |              |       
| |                           |                                     |              | 13,699
| |                           |                                     |              |       
| | Accumulated amortization: |                                     |              |       
| |                           | Capitalized computer software costs |              |       
| |                           | Assembled workforce                 |              |       
| |                           | Customer base                       |              |       
| |                           | Acquired technology                 |              |       
| |                           |                                     |              |       
| |                           |                                     |              | 4,907 
| |                           |                                     |              |       
| | Amortized cost            |                                     | $            | 8,972 
| |                           |                                     |              |       
| |                           |                                     |              |       

F - 28

---

---

|                                           |  | OPTIBASE LTD. AND ITS SUBSIDIARIES
|------------------------------------------ |  | ----------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in
  thousands               
|                                           |  |                                   

|NOTE 8:-    OTHER ASSETS, NET (Cont .)
|--------------------------------------

| |                                                                                                                                      | 
| | ------------------------------------------------------------------------------------------------------------------------------------ | 
| | Amortization
  expenses amounted to $ 694, $ 5,214 and $ 1,047 for the years ended
  December 31, 2000, 2001 and 2002, respectively.
| |                                                                                                                                     
| | In 2001, the
  Company wrote-off $ 140 of capitalized computer software costs as part
  of the restructuring plan (see Note 14).    
| |                                                                                                                                     
| | As for
  impairment charges for assembled workforce, customer base and acquired
  technology in 2001 and 2002, see Note 1c.         
| |                                                                                                                                     
| | As for
  charges, see Note 11d.                                                                                                     
| |                                                                                                                                     

|NOTE 9:-    OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
|-------------------------------------------------------

| |                                                |  | December 31, |      
| | ---------------------------------------------- |  | ------------ | -----
| |                                                |  |              |      
| |                                                |  | 2001         |      
| |                                                |  |              |      
| | Employees and payroll accruals                 |  | $            | 2,034
| | Royalties (see Note 11b)                       |  |              | 2,113
| | Accrued expenses                               |  |              | 1,779
| | Restructuring accruals (see Notes 1d and
  14) |  |              | 503  
| | Other                                          |  |              | 550  
| |                                                |  |              |      
| |                                                |  | $            | 6,979
| |                                                |  |              |      

|NOTE 10:-    FINANCIAL ARRANGEMENTS
|-----------------------------------

| |                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As of
  December 31, 2001 and 2002, the Company had authorized lines of credit in the
  amount of $ 10,906 and $ 10,844, respectively, out of which $ 906 and $
  844, respectively, are linked to the NIS and bear an annual bank interest
  rate of Prime +1%-1.25%, and $ 10,000, bear an annual interest rate of LIBOR
  +0.5%. The amount of $ 10,000 is secured against financial securities of the
  Company.
| |                                                                                                                                                                                                                                                                                                                                                                                                                     
| | The Company
  had an unutilized line of credit in the amount of $ 10,844 as of December 31,
  2002 (there is no material fee for the unused portion of the line of credit).                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                     

|NOTE 11:-    COMMITMENTS AND CONTINGENT LIABILITIES
|---------------------------------------------------

| |    |                                                                                                                                                                                   
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. | Lease
  commitments:                                                                                                                                                              
| |    |                                                                                                                                                                                   
| |    | The Companys facilities and the facilities
  and motor vehicles of certain of its subsidiaries, are leased under several
  operating lease agreements for periods ending in 2006.
| |    |                                                                                                                                                                                   
| |    | Future minimum lease commitments under
  non-cancelable operating leases are as follows:                                                                                          

| | Year ended December 31, |  |   |       | 
| | ----------------------- |  | - | ----- | 
| | 2003                    |  | $ | 981   | 
| | 2004                    |  |   | 298   | 
| | 2005                    |  |   | 225   | 
| | 2006                    |  |   | 105   | 
| |                         |  |   |       | 
| |                         |  | $ | 1,609 | 
| |                         |  |   |       | 

F - 29

---

---

|                                           |  | OPTIBASE LTD. AND ITS SUBSIDIARIES
|------------------------------------------ |  | ----------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in
  thousands               
|                                           |  |                                   

|NOTE 11:-    COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
|-----------------------------------------------------------

| |    |                                                                                                                                                                                                                                                                                                                                                                                               
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | As of December 31, 2002, the Company
  provided for long-term deposits amounting to $ 239, in accordance with
  the lease agreements. (See also Note 11c).                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                               
| |    | Rent expenses amounted to $ 620, $ 713
  and $ 710 for the years ended December 31, 2000, 2001 and 2002, respectively.
  Motor vehicle leasing expenses for the years ended December 31, 2000, 2001
  and 2002, were $ 259, $ 530 and $ 517, respectively.                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                               
| | b. | Royalty
  commitments:                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                               
| |    | 1.                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                               
| |    | 2.                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                               
| | c. | Guarantees:                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                               
| |    | The Company has provided bank guarantees in
  favor of a lessor totaling $ 108.                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                               
| | d. | Assets
  pledged as collateral:                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                               
| |    | As
  collateral for the Companys liabilities to banks, a fixed charge has been
  placed on the Companys property and equipment, shareholders equity and a
  floating charge (security interest in assets of the Company as they exist
  from time to time) has been placed on all the other assets of the Company.
  All of the collaterals are in respect of the Companys line of credit.
| |    |                                                                                                                                                                                                                                                                                                                                                                                               

F - 30

---

---

|OPTIBASE LTD. AND ITS SUBSIDIARIES        
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|NOTE 11:-    COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
|-----------------------------------------------------------

| |                                                                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | e.                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                               
| | From time to
  time, the Company may be a party to claims arising in the ordinary course of
  its business operations. In the opinion of management, it is not anticipated
  that the settlement or resolution of any such matters, if any, will have a
  material adverse impact on the Companys financial condition, results of
  operations or cash flows.
| |                                                                                                                                                                                                                                                                                                                                                               

|NOTE 12:-    TAXES ON INCOME
|----------------------------

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | Results for
  tax purposes are measured in terms of earnings in NIS after certain adjustments
  for increases in the Israeli Consumer Price Index (CPI). As explained in
  Note 2b, the financial statements are measured in U.S. dollars. The
  difference between the annual change in the Israeli CPI and in the NIS/dollar
  exchange rate causes a further difference between taxable income and the
  income before taxes shown in the financial statements. In accordance with
  paragraph 9(f) of SFAS No. 109, the Company has not provided deferred income
  taxes on the difference between the functional currency and the tax bases of
  assets and liabilities.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | b.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | The
  Companys production facilities have been granted the status of Approved
  Enterprise under the law, for four separate investment programs, which were
  approved in February 1991, January 1994, April 1998 and May 2000. The Company
  completed its investments according to its first, second and third programs
  on November 30, 1994, July 1, 1995 and December 31, 1999, respectively. The
  Company is in the process of implementing the fourth program of investment.                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | According to
  the provisions of the law, the Company has elected the Alternative plan
  benefits - waiver of grants in return for a tax exemption. For the first two
  investment programs, the Company has also elected long-term loans under
  Government guarantees along with a tax exemption. As of December 31, 2001 and
  2002, there were no outstanding loans and the right to receive such loans was
  terminated.                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | According to
  the provisions of the law, income derived from the Approved Enterprise
  programs, under the Alternative plan benefit, will be tax-exempt for a
  period of two years, commencing with the year in which the Company first
  earns taxable income and subject to corporate taxes at the reduced tax rate
  of 15%-25%, for an additional period of five to eight years (subject to an
  adjustment based upon the percentage of foreign investor ownership in the
  Company).                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | The law also
  grants entitlement to claim accelerated depreciation on equipment used by the
  Approved Enterprise during five tax years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

F - 31

---

---

|OPTIBASE LTD. AND ITS SUBSIDIARIES        
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|NOTE 12:-    TAXES ON INCOME (Cont.)
|------------------------------------

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | The
  tax-exempt income attributable to the Approved Enterprise can be
  distributed to shareholders without subjecting the Company to taxes only upon
  the complete liquidation of the Company. If such retained tax-exempt income
  is distributed in a manner other than upon the complete liquidation of the
  Company, it would be taxed at the reduced corporate tax rate applicable to
  such profits (between 10%-25%). The Company has decided not to declare
  dividends out of such tax-exempt income. Accordingly, no deferred income
  taxes have been provided on income attributable to the Companys Approved
  Enterprise.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | The
  entitlement to the above benefits is conditional upon the Companys
  fulfilling the conditions stipulated by the above law, regulations published
  hereunder and the instruments of approval for the specific investments in
  Approved Enterprises. In the event of failure to comply with these
  conditions, the benefits may be canceled and the Company may be required to
  refund the amount of the benefits, in whole or in part, including interest.
  As of December 31, 2002, management believes that the Company is meeting all
  of the aforementioned conditions.                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | The benefit
  periods of the first and second programs have commenced. The benefits of the
  third and fourth programs have not yet commenced.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | Should the
  Company derive income from sources other than the Approved Enterprise
  during the relevant period of benefits, such income will be taxable at the
  regular corporate tax rates of 36%.                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | c.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | d.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | e.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

F - 32

---

---

|OPTIBASE LTD. AND ITS SUBSIDIARIES        
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|NOTE 12:-    TAXES ON INCOME (Cont.)
|------------------------------------

| |   
| | --
| | f.
| |   
| |   

| |                                                     | December 31,
| | --------------------------------------------------- | ------------
| |                                                     |             
| |                                                     | 2001        
| |                                                     |             
| | Operating loss carryforward                         |             
| | Reserves and allowances                             |             
| |                                                     |             
| |                                                     |             
| | Net deferred tax asset before valuation
  allowance |             
| | Valuation allowance                                 |             
| |                                                     |             
| | Net deferred tax asset                              |             
| |                                                     |             
| |                                                     |             



| |    | The Company
  and its subsidiaries have provided valuation allowances in respect of
  deferred tax assets resulting from tax loss carryforward and other
  differences. Management currently believes that, since the Company and its
  subsidiaries have a history of losses, it is more likely than not that the
  deferred tax regarding the loss carryforward and other temporary differences
  will not be realized in the foreseeable future. During 2002, the Company and
  its subsidiaries increased its valuation allowance by approximately $2,290.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | g. | Net
  operating losses carryforward:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    | Through
  December 31, 2002, Optibase Ltd. had a net operating losses carryforward for
  tax purposes in Israel of approximately $15,054, which may be carried forward
  and offset against taxable income in the future, for an indefinite period.                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    | As of
  December 31, 2002, Optibase Inc. had U.S. federal net operating loss
  carryforward of approximately $15,291 that can be carried forward and offset
  against taxable income for 20 years, no later than 2006 to 2021. Utilization
  of U.S. net operating losses may be subject to the substantial annual
  limitation due to the change in ownership provisions of the Internal
  Revenue Code of 1986, and similar state provisions. The annual limitation may
  result in the expiration of net operating losses before utilization.            

F - 33

---

---

|OPTIBASE LTD. AND ITS SUBSIDIARIES        
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|NOTE 12:-    TAXES ON INCOME (Cont.)
|------------------------------------

| | h. | Reconciliation
  of the theoretical tax expenses to the actual tax expenses:                                                                                                                                                                       
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | A
  reconciliation between the theoretical tax expense, assuming all income is
  taxed at the statutory tax rate applicable to the income of the Company and
  the actual tax expense as reported in the statements of operations, is as
  follows:

| |                                                                                                                                                                                  | Year ended December 31, |  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------- | -
| |                                                                                                                                                                                  |                         |  
| |                                                                                                                                                                                  | 2000                    |  
| |                                                                                                                                                                                  |                         |  
| | Loss before taxes as reported                                                                                                                                                    |                         | $
| |                                                                                                                                                                                  |                         |  
| | Theoretical tax benefit computed at the
  statutory
       rate (36%)                                                                                                            |                         | $
| | Tax adjustments in respect of inflation in
  Israel                                                                                                                              |                         |  
| | Issuance expenses and tax benefits in
  respect
       of options to employees that were allowed as an
       expense in respect of which deferred taxes were
  not     provided |                         |  
| | Losses and other items for which a
  valuation
       allowance was provided                                                                                                     |                         |  
| | Interest income subject to a lower tax rate                                                                                                                                      |                         |  
| | Non-deductible write-off of in-process
  technology
       and amortization of other assets                                                                                      |                         |  
| | Interest income for tax purposes and other                                                                                                                                       |                         |  
| | Other non-deductible expenses                                                                                                                                                    |                         |  
| |                                                                                                                                                                                  |                         |  
| | Income tax expense                                                                                                                                                               |                         | $
| |                                                                                                                                                                                  |                         |  



| | i. | Loss before
  taxes on income consists of the following:
| | -- | --------------------------------------------------------

| |          | Year ended December 31, |       
| | -------- | ----------------------- | ------
| |          |                         |       
| |          | 2000                    |       
| |          |                         |       
| | Domestic |                         | $     
| | Foreign  |                         |       
| |          |                         |       
| |          | $                       | (8,962
| |          |                         |       

| | j. | The
  provision for income taxes is comprised as follows:
| | -- | ---------------------------------------------------------

| |          | Year ended December 31, |  
| | -------- | ----------------------- | -
| |          |                         |  
| |          | 2000                    |  
| |          |                         |  
| |          |                         |  
| | Domestic |                         | $
| |          |                         |  
| |          |                         |  

F - 34

---

---

|OPTIBASE LTD. AND ITS SUBSIDIARIES        
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|NOTE 13:-    STOCKHOLDERS EQUITY
|---------------------------------

| |   
| | --
| | a.
| |   
| |   
| |   
| |   
| |   
| |   
| |   
| |   
| |   
| | b.
| |   
| |   
| |   
| |   
| |   
| | c.
| |   
| |   

F - 35

---

---

|OPTIBASE LTD. AND ITS SUBSIDIARIES        
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|U.S. dollars in thousands                 

|NOTE 13:-    STOCKHOLDERS EQUITY (Cont.)
|-----------------------------------------

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------
| | d.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Stock
  options:
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                 
| | Since 1990,
  the Company has granted options to key employees and directors to purchase
  Ordinary shares. Under the terms of these grants, options generally become
  exercisable ratably over a three-year period commencing with the date of
  grant. The options generally expire no later than seven years from the date
  of the grant (see also Note 18c).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | In 1999, the
  Company adopted three option plans: an Israeli Option Plan (1999 Israeli
  option plan), a U.S. Option Plan (1999 U.S. option plan) and an Israeli
  option plan entitling the grantees to tax benefits under Section 102 to the
  Israeli Income Tax Ordinance (102 option plan). Under the terms of the
  above option plans, options may be granted to employees, officers, directors
  and various service providers of the Company and its subsidiaries. Also, the
  options generally become exercisable monthly over a four-year period,
  commencing one year after date of the grant, subject to the continued
  employment of the employee. The options generally expire no later than 10
  years from the date of the grant. In April 2001, the Board of Directors of
  the Company approved the adoption of the 2001 Non-statutory Share Option
  Plan. Under the terms of this plan, options may be granted to available
  personnel, employees, directors and consultants. The options to be granted
  under the plan are limited to non-statutory options. The plan has terms
  similar to those contained under the 1999 U.S. Option Plan.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | The exercise price of the options granted
  under the plans may not be less than the nominal value of the shares into
  which such options are exercised. Any options, which are forfeited or
  cancelled before expiration, become available for future grants.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | The total
  amount of options available for future grants as of December 31, 2002,
  amounted to 1,124,516.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | In
  connection with the acquisition of ViewGraphics, the Company granted 753,384
  options in exchange for the options held by employees of ViewGraphics as of
  the acquisition date. These options were not granted under any of the option
  plans mentioned above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | A summary of
  the Companys stock option activity, and related information, is as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

| |                                                   |           | Year ended
  December 31 |          
| | ------------------------------------------------- | --------- | ------------------------ | ---------
| |                                                   |           |                          |          
| |                                                   |           | 2000                     |          
| |                                                   |           |                          |          
| |                                                   |           | Amount                   |          
| |                                                   |           |                          |          
| | Outstanding at the 
      beginning of the year   |           |                          | 1,472,952
| |                                                   | Granted   |                          |          
| |                                                   | Exercised |                          |          
| |                                                   | Forfeited |                          |          
| |                                                   |           |                          |          
| | Outstanding at the end 
      of the year         |           |                          | 2,901,481
| |                                                   |           |                          |          
| | Exercisable options at 
      the end of the year |           |                          | 774,288  
| |                                                   |           |                          |          

F - 36

---

---

|OPTIBASE LTD. AND ITS SUBSIDIARIES        
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|U.S. dollars in thousands                 

|NOTE 13:-    STOCKHOLDERS EQUITY (Cont.)
|-----------------------------------------

| |                                                                                                                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Deferred
  stock compensation, which represents the excess of the market value over the
  exercise price for options granted during 2000 totaled $ 4,794. The deferred
  compensation is amortized to the statement of operations over a vesting
  period of up to four years. Amortization expenses in 2000, 2001 and 2002
  totaled $ 302, $ 1,911 and $ 1,156, respectively.
| |                                                                                                                                                                                                                                                                                                                                                                                
| | The options
  outstanding as of December 31, 2002, have been separated into ranges of
  exercise price as follows:                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                

| | Range of 
  exercise
  price |  | Options 
  outstanding
  as of 
  December31, 2002 |           | Weighted 
  average 
  number of 
  years remaining 
  contractual life |  | Weighted 
  average 
  exercise 
  price |      | Options
  exercisable
  as of
  December 31,
  2002 |  | Weighted
  average
  exercise
  price |      
| | ---------------------------- |  | -------------------------------------------------- | --------- | ----------------------------------------------------------------------- |  | ---------------------------------------- | ---- | --------------------------------------------------- |  | ------------------------------------- | -----
| |                              |  |                                                    |           |                                                                         |  |                                          |      |                                                     |  |                                       |      
| | $0.17                        |  |                                                    | 168,833   |                                                                         |  |                                          | 4.93 |                                                     |  | $                                     | 0.17 
| | $1.52 - $2.09                |  |                                                    | 18,000    |                                                                         |  |                                          | 8.26 |                                                     |  | $                                     | 1.70 
| | $2.38 - $3.90                |  |                                                    | 1,278,201 |                                                                         |  |                                          | 7.36 |                                                     |  | $                                     | 2.89 
| | $4.34 - $6.63                |  |                                                    | 942,645   |                                                                         |  |                                          | 4.88 |                                                     |  | $                                     | 5.71 
| | $7.00 - $8.00                |  |                                                    | 50,158    |                                                                         |  |                                          | 3.37 |                                                     |  | $                                     | 7.06 
| | $12.03 - $16.88              |  |                                                    | 347,668   |                                                                         |  |                                          | 4.60 |                                                     |  | $                                     | 14.77
| | $17.5 - $19.63               |  |                                                    | 132,000   |                                                                         |  |                                          | 4.36 |                                                     |  | $                                     | 19.09
| | $23.75                       |  |                                                    | 56,000    |                                                                         |  |                                          | 4.25 |                                                     |  | $                                     | 23.75
| | $28.38                       |  |                                                    | 8,000     |                                                                         |  |                                          | 4.22 |                                                     |  | $                                     | 28.38
| | $32                          |  |                                                    | 5,000     |                                                                         |  |                                          | 4.10 |                                                     |  | $                                     | 32.00
| |                              |  |                                                    |           |                                                                         |  |                                          |      |                                                     |  |                                       |      
| |                              |  |                                                    | 3,006,505 |                                                                         |  |                                          |      |                                                     |  | $                                     | 6.27 
| |                              |  |                                                    |           |                                                                         |  |                                          |      |                                                     |  |                                       |      

| | Weighted
  average fair values and weighted average exercise prices of options whose
  exercise price is less, equals or exceeds market price of the shares at date
  of grant are as follows:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                    |  | Weighted average fair
  values on grantdate |       | Weighted average
  exercise prices | 
| | -------------------------------------------------- |  | ------------------------------------------- | ----- | ---------------------------------- | 
| |                                                    |  |                                             |       |                                    | 
| |                                                    |  | Year ended December 31,                     |      
| |                                                    |  |                                             |      
| |                                                    |  | 2000                                        |       | 2001                               | 
| |                                                    |  |                                             |       |                                    | 
| | Less than market 
     value at date of
     grant |  | $                                           | 9.76  |                                    | 
| |                                                    |  |                                             |       |                                    | 
| |                                                    |  |                                             |       |                                    | 
| | Equal to market value 
     at date of grant       |  | $                                           | 13.94 |                                    | 
| |                                                    |  |                                             |       |                                    | 
| |                                                    |  |                                             |       |                                    | 
| | Exceeds market value 
     at date of grant        |  | $                                           | 8.94  |                                    | 
| |                                                    |  |                                             |       |                                    | 

| | e.                                                                                                                                                                                                                                                                                                                                                        | Warrants: | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------- | 
| |                                                                                                                                                                                                                                                                                                                                                           |           | 
| | In December
  1992, the Company issued warrants to shareholders to purchase 125,725
  NIS 0.13 par value Ordinary shares of the Company at an exercise price
  of $ 0.33 per share. The warrants have no expiration date. On February 15,
  1999, 41,908 of these warrants were exercised, and 83,817 warrants are
  outstanding as of December 31, 2002.

F - 37

---

---

|OPTIBASE LTD. AND ITS SUBSIDIARIES        
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|U.S. dollars in thousands                 

|NOTE 13:-    STOCKHOLDERS EQUITY (Cont.)
|-----------------------------------------

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------
| | f.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Employee
  Share Purchase Plan:
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                
| | In May 2000,
  the Company adopted an Employee Share Purchase Plan, allowing all eligible
  employees of the Company and its subsidiaries to purchase, with amounts
  deducted from the employees salaries, shares of the Company, at a discount
  from fair market value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | The plan
  contains consecutive, overlapping 24-month offering periods. Each offering
  period includes four six-month purchase periods. Participants may purchase
  Ordinary shares through payroll deductions of up to 15% of their
  compensation. The price will be 85% of the lower of the fair market value of
  the Company Ordinary shares at the beginning of an offering period or at the
  end of a purchase period. If the fair market value at the end of a purchase
  period is less than the fair market value at the beginning of the offering
  period, participants will be withdrawn from the current offering period
  following their purchase of shares and will be automatically re-enrolled in a
  new offering period.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | Under this
  plan, the Company granted 22,443, 134,292 and 184,868 shares at an average
  share price of $11.1, $3.36 and $1.85 in 2000, 2001 and 2002, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | In November
  2002, the Board of Directors of the Company terminated this plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

|NOTE 14:-    RESTRUCTURING CHARGES
|----------------------------------

| |                                                                                                                                                                                                                                                                                                                                                                                         | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| | During the
  third quarter of 2001, the Company announced that it was implementing a
  restructuring plan (the Plan) intended to further reduce costs. The Plan
  consisted of employee termination benefits associated with the involuntary
  termination of 38 employees. Through the third quarter of 2001, the Plan and
  the benefit arrangement were communicated to employees. | 
| |                                                                                                                                                                                                                                                                                                                                                                                         | 
| | The
  following table summarizes the restructuring accruals status as of December
  31, 2001:                                                                                                                                                                                                                                                                                           | 

| |                                                         |  | Restructuring
  charge |       | Utilized |          | Balance at
  December 31,
  2001 |    
| | ------------------------------------------------------- |  | ---------------------- | ----- | -------- | -------- | -------------------------------- | ---
| |                                                         |  |                        |       |          |         
| |                                                         |  |                        | Cash  |          | Non-cash |                                  |    
| |                                                         |  |                        |       |          |          |                                  |    
| | Employee termination benefits and 
     related costs   |  | $                      | 1,075 |          |          | $                                | 754
| | Professional fees                                       |  |                        | 125   |          |          |                                  | 43 
| | Impairment of property and 
     equipment              |  |                        | 588   |          |          |                                  | -  
| | Impairment of capitalized computer 
     software costs |  |                        | 140   |          |          |                                  | -  
| | Other exit costs                                        |  |                        | 136   |          |          |                                  | 36 
| |                                                         |  |                        |       |          |          |                                  |    
| |                                                         |  | $                      | 2,064 |          |          | $                                | 833
| |                                                         |  |                        |       |          |          |                                  |    

| | The
  restructuring was accounted for in accordance with EITF 94-3 and in
  accordance with SAB 100. The impairment of property and equipment was
  accounted in accordance with SFAS 121.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                           
| | The
  restructuring accruals as of December 31, 2001, were utilized during 2002.                                                                                                          

F - 38

---

---

|OPTIBASE LTD. AND ITS SUBSIDIARIES        
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|U.S. dollars in thousands                 

|NOTE 15:-    GEOGRAPHIC INFORMATIONS AND MAJOR CUSTOMERS
|--------------------------------------------------------

| |   
| | --
| | a.
| |   
| |   
| |   
| |   

| |                            |  | 2000                |        | 2001                   |  | 2002                |       
| | -------------------------- |  | ------------------- | ------ | ---------------------- |  | ------------------- | ------
| |                            |  |                     |        |                        |  |                     |       
| |                            |  | Total 
  revenues*) |        | Long-
  lived
  assets |  | Total 
  revenues*) |       
| |                            |  |                     |        |                        |  |                     |       
| | Israel                     |  | $                   | 4,873  |                        |  | $                   | 15,172
| | North America              |  |                     | 13,897 |                        |  |                     | 24,972
| | Europe                     |  |                     | 4,511  |                        |  |                     | 25    
| | Far East (excluding Japan) |  |                     | 4,305  |                        |  |                     | -     
| | Japan                      |  |                     | 2,271  |                        |  |                     | -     
| | Other                      |  |                     | 842    |                        |  |                     | -     
| |                            |  |                     |        |                        |  |                     |       
| |                            |  | $                   | 30,699 |                        |  | $                   | 40,169
| |                            |  |                     |        |                        |  |                     |       

| |  | *) | Net revenues
  are attributed to countries based on end-customer location.
| |  | -- | --------------------------------------------------------------------------

| | b. | Major
  customer data as a percentage of total revenues:
| | -- | --------------------------------------------------------

| |            |  | Year ended December 31, |     
| | ---------- |  | ----------------------- | ----
| |            |  |                         |     
| |            |  | 2000                    |     
| |            |  |                         |     
| |            |  | %                       |     
| |            |  |                         |     
| | Customer A |  |                         | 12.5
| | Customer B |  |                         | 11.4
| | Customer C |  |                         | 4.3 

|NOTE 13:-    RELATED PARTY TRANSACTIONS
|---------------------------------------

| |                                                                                                             
| | ------------------------------------------------------------------------------------------------------------
| | The Company
  has signed lease, license and distribution agreements with V. Box through
  December 31, 2002.
| |                                                                                                             
| | The balances
  with and the revenues derived from related party were as follows:                            

| |    |                                            |  | December 31, |   
| | -- | ------------------------------------------ |  | ------------ | --
| |    |                                            |  |              |   
| |    |                                            |  | 2001         |   
| |    |                                            |  |              |   
| | a. | Balances with related party:               |  |              |   
| |    | Trade receivables:                         |  |              |   
| |    | V. Box                                     |  | $            | 21
| |    |                                            |  |              |   
| | b. | Revenues from related party:               |  |              |   
| |    | V. Box                                     |  | $            | 48
| |    |                                            |  |              |   
| | c. | Lease payment received from related party: |  |              |   
| |    | V. Box                                     |  | $            | 18
| |    |                                            |  |              |   

F - 39

---

---

|OPTIBASE LTD. AND ITS SUBSIDIARIES        
|------------------------------------------
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|U.S. dollars in thousands                 

|NOTE 16:-    RELATED PARTY TRANSACTIONS (Cont.)
|-----------------------------------------------

| |    |                               |  | December 31, |  
| | -- | ----------------------------- |  | ------------ | -
| |    |                               |  |              |  
| |    |                               |  | 2001         |  
| |    |                               |  |              |  
| | d. | Purchases from related party: |  |              |  
| |    | V. Box                        |  | $            | -
| |    |                               |  |              |  

| | See also
  Note 6.
| | ------------------
| |                   

|NOTE 17:-    SELECTED STATEMENTS OF OPERATIONS DATA
|---------------------------------------------------

| |   
| | --
| | a.

| |                                              |  | Year
  ended December 31, |       
| | -------------------------------------------- |  | ------------------------- | ------
| |                                              |  |                           |       
| |                                              |  | 2000                      |       
| |                                              |  |                           |       
| | Total research and development costs         |  | $                         | 7,736 
| | Less - grants and participation              |  |                           | (1,409
| | Capitalization of software development costs |  |                           | (80   
| |                                              |  |                           |       
| |                                              |  | $                         | 6,247 
| |                                              |  |                           |       

| | b. | Financial income:
| | -- | -----------------

| | Financial income:                                                                           |  |   |       |  |  |   |       |  |  |   |       |  | 
| | ------------------------------------------------------------------------------------------- |  | - | ----- |  |  | - | ----- |  |  | - | ----- |  | 
| | Interest                                                                                    |  | $ | 5,177 |  |  | $ | 3,187 |  |  | $ | 3,191 |  | 
| | Foreign currency remeasurement differences                                                  |  |   | 62    |  |  |   | 151   |  |  |   | 125   |  | 
| | Realized gains on sale of available-for-sale 
       marketable securities                  |  |   | -     |  |  |   | 5     |  |  |   | 852   |  | 
| |                                                                                             |  |   |       |  |  |   |       |  |  |   |       |  | 
| |                                                                                             |  |   | 5,239 |  |  |   | 3,343 |  |  |   | 4,168 |  | 
| | Financial expenses:                                                                         |  |   |       |  |  |   |       |  |  |   |       |  | 
| | Interest                                                                                    |  |   | 150   |  |  |   | 212   |  |  |   | 96    |  | 
| | Unrealized losses on trading marketable securities                                          |  |   | -     |  |  |   | 465   |  |  |   | -     |  | 
| | Realized losses on sale of trading marketable 
       securities                            |  |   | -     |  |  |   | -     |  |  |   | 359   |  | 
| | Realized losses on sale of available-for-sale 
       marketable securities                 |  |   | 6     |  |  |   | -     |  |  |   | -     |  | 
| | Other than temporary decrease in value of available- 
       for-sale marketable securities |  |   | -     |  |  |   | 1,791 |  |  |   | -     |  | 
| |                                                                                             |  |   |       |  |  |   |       |  |  |   |       |  | 
| |                                                                                             |  |   | 156   |  |  |   | 2,468 |  |  |   | 455   |  | 
| |                                                                                             |  |   |       |  |  |   |       |  |  |   |       |  | 
| |                                                                                             |  | $ | 5,083 |  |  | $ | 875   |  |  | $ | 3,713 |  | 
| |                                                                                             |  |   |       |  |  |   |       |  |  |   |       |  | 

|NOTE 18:-    SUBSEQUENT EVENTS (UNAUDITED)
|------------------------------------------

| |   
| | --
| | a.
| |   
| | b.
| |   
| | c.

- - - - - - - - - - -

F - 40

---

---

Signatures

The
registrant hereby certifies that it meets all the requirements for filing on
Form 20-F and has duly caused and authorized this annual report to be signed on
its behalf by the undersigned.

|Dated: June
  30, 2003 |     | OPTIBASE
  LIMITED                                   
|---------------------- | --- | -----------------------------------------------------
|                       |     |                                                      
|                       | By: | /s/ Tom
  Wyler                                      
|                       |     |                                                      
|                       |     | Chairman of
  the Board
  Principal Executive Officer

73

---

---

CERTIFICATIONS

I, Tom Wyler, certify that:

|(1) | I have
  reviewed this annual report on Form 20-F of Optibase Ltd.;                                                                                                                                                                                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                
|(2) | Based on my
  knowledge, this annual report does not contain any untrue statement of a
  material fact or omit to state a material fact necessary to make the
  statements made, in light of the circumstances under which such statements
  were made, not misleading with respect to the period covered by this annual
  report;                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                
|(3) | Based on my
  knowledge, the financial statements, and other financial information included
  in this annual report, fairly present in all material respects the financial
  condition, results of operations and cash flows of the registrant as of, and
  for, the periods presented in this annual report;                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                
|(4) | The
  registrants other certifying officer and I are responsible for establishing
  and maintaining disclosure controls and procedures (as defined in Exchange
  Act Rules 13a-14 and 15d-14) for the registrant and have:                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                
|    | (a)                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                
|    | (b)                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                
|    | (c)                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                
|(5) | The
  registrants other certifying officer and I have disclosed, based on our most
  recent evaluation, to the registrants auditors and the audit committee of
  registrants board of directors (or persons performing the equivalent
  function):                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                
|    | (a)                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                
|    | (b)                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                
|(6) | The
  registrants other certifying officer and I have indicated in this annual
  report whether or not there were significant changes in internal controls or
  in other factors that could significantly affect internal controls subsequent
  to the date of our most recent evaluation, including any corrective actions
  with regard to significant deficiencies and material weaknesses.

|Date: June
  30, 2003 |                          
|--------------------- | -------------------------
|                      | /s/ Tom
  Wyler          
|                      | Chief
  Executive Officer

74

---

---

I, Zvi Halperin, certify
that:

|(1) | I have
  reviewed this annual report on Form 20-F of Optibase Ltd.;                                                                                                                                                                                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                
|(2) | Based on my
  knowledge, this annual report does not contain any untrue statement of a
  material fact or omit to state a material fact necessary to make the
  statements made, in light of the circumstances under which such statements
  were made, not misleading with respect to the period covered by this annual
  report;                                                             
|    |                                                                                                                                                                                                                                                                                                                                                                                                
|(3) | Based on my
  knowledge, the financial statements, and other financial information included
  in this annual report, fairly present in all material respects the financial
  condition, results of operations and cash flows of the registrant as of, and
  for, the periods presented in this annual report;                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                
|(4) | The
  registrants other certifying officer and I are responsible for establishing
  and maintaining disclosure controls and procedures (as defined in Exchange
  Act Rules 13a-14 and 15d-14) for the registrant and have:                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                
|    | (a)                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                
|    | (b)                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                
|    | (c)                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                
|(5) | The
  registrants other certifying officer and I have disclosed, based on our most
  recent evaluation, to the registrants auditors and the audit committee of
  registrants board of directors (or persons performing the equivalent
  function):                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                
|    | (a)                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                
|    | (b)                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                
|(6) | The
  registrants other certifying officer and I have indicated in this annual
  report whether or not there were significant changes in internal controls or
  in other factors that could significantly affect internal controls subsequent
  to the date of our most recent evaluation, including any corrective actions
  with regard to significant deficiencies and material weaknesses.

|Date: June
  30, 2003, 2003 |                          
|--------------------------- | -------------------------
|                            | /s/ Zvi
  Halperin       
|                            | Chief
  Financial Officer

75

---

---

Exhibits

|Exhibit 
  Number |  | Description of Document
|----------------- |  | -----------------------
|                  |  |                        
|                  |  |                        
|1.1               |  |                        
|1.2               |  |                        
|(a)2.1            |  |                        
|(a)4.1            |  |                        
|                  |  |                        
|(a)4.2            |  |                        
|(e)4.3            |  |                        
|(e)4.4            |  |                        
|(c)4.5            |  |                        
|(c)4.6            |  |                        
|4.7               |  |                        
|4.8               |  |                        
|4.9               |  |                        
|8.1               |  |                        
|(b)10.1           |  |                        
|(b)10.2           |  |                        
|(b)10.3           |  |                        
|(b)10.4           |  |                        
|(d)10.5           |  |                        
|(a)10.4           |  |                        
|10.5              |  |                        
|10.6              |  |                        

76

---

---

| | (a) | Incorporated
  by reference to exhibits filed with the Form 6-K filed on December 7, 2000.                                                                                                                                                             
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                                                                                        
| | (b) | Incorporated
  by reference to exhibits filed with the Registrants Annual Report on Form
  20-F for the fiscal year ended December 31, 1999.                                                                                                          
| |     |                                                                                                                                                                                                                                                        
| | (c) | Incorporated by reference to exhibits filed with the Form 6-K filed
  on February 15, 2002                                                                                                                                                             
| |     |                                                                                                                                                                                                                                                        
| | (d) | Incorporated by reference to Exhibit 10.5 filed with the Registrants
  Annual Report on Form 20-F for the fiscal year ended December 31, 2000, and
  with respect to the amendment, Exhibit 99.7 filed with the Form 6-K filed on
  February 15, 2002.
| |     |                                                                                                                                                                                                                                                        
| | (e) | Incorporated by reference to Exhibits 4.3 and 4.4 filed with the
  Registrants Annual Report on Form 20-F for the fiscal year ended December
  31, 2001.                                                                                              

77

---

---

Exhibit 4.7



|Optibase and BDX China business agreement
  for 2003
|----------------------------------------------------

1.     Distributor
relationship

We believe that Optibase, BDX and Techex have made maximum effort in
the last weeks to find a 3way deal and we were unable to find a suitable way.

Therefore, we propose that TEI will phase out as distributor in China
and BDX will assume full responsibility for distributing Optibase open systems as well as MGW2x00 and Infovalue system.

BDX confirms it will (continue to) provide
support to all existing Optibase users in China who request this, so that no
end-user will become disadvantaged by the appointment.

The forecast that you prepared for 2003 Optibase business is showing below:

2003 quarterly sales by product and application

|Product group                        |  | Application         |  | Q1  |  | Q2  |  | Q3  |  | Q4   |  | Grand Total | 
|------------------------------------ |  | ------------------- |  | --- |  | --- |  | --- |  | ---- |  | ----------- | 
|                                     |  |                     |  |     |  |     |  |     |  |      |  |             | 
|MM200S
  China FD1                   |  | streaming
  project |  | 35  |  | 70  |  | 35  |  | 70   |  | 210         | 
|Publisher
  (upgrade)                |  | hi
  end cc project |  | 45  |  | 65  |  | 65  |  | 90   |  | 265         | 
|MM200
  Networker SDI (Publisher LE) |  | YUV
  CC            |  | 0   |  | 160 |  | 160 |  | 160  |  | 490         | 
|MGW2x00
  & Infovalue                |  | Hi
  end Project    |  | 60  |  | 60  |  | 90  |  | 180  |  | 390         | 
|MM200
  Networker                    |  | VC
  project        |  | 70  |  | 70  |  | 140 |  | 210  |  | 490         | 
|MM200
  Basic FD1                    |  | VC
  project        |  | 65  |  | 65  |  | 130 |  | 130  |  | 390         | 
|Decoders                             |  | streaming
  & cc    |  | 50  |  | 50  |  | 50  |  | 50   |  | 200         | 
|MM100S                               |  | lo
  end cc         |  | 90  |  | 90  |  | 120 |  | 120  |  | 420         | 
|Others                               |  | New
  product       |  | 35  |  | 30  |  | 40  |  | 50   |  | 155         | 
|Ground total                         |  |                     |  | 450 |  | 660 |  | 830 |  | 1060 |  | 3,000       | 

2.     Marketing and PR funding

With the plan below, we believe we make available a great amount of funding,
aimed to aggressively support our distributor to attack the market with vigor.

Page 1 of 3

---

---

Marketing rebate 2003

To encourage BDX market effort, Optibase proposes to continue last year
marketing rebate policy.

The idea here is again that, based on excellent performance, Optibase
will give more incentive towards high growth by giving financial benefit
(rebate) at the end of every half year.

Important is that
Optibase wants to be able to choose in advance on which activities the rebate
money will be spend in order to align our marketing strategy. After the
activities, the relevant invoice and proofs are required.

| | a. | If BDX
  fulfills 3 million USD purchase target in 2003, Optibase will issue 3% credit as
  market support, that is 90k USD.                                                                                                                                               
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                            
| | b. | If the actual
  sales value to BDX is exceed 3 million USD, the over part rebate ratio will
  be 4%.                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                            
| | c. | All the
  credit will be issued against BDX market expense activities.                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                            
| | d  | At
  end of Q2/2003, Optibase will issue H1 rebate if BDX achieve H1 target which both parties agreed in advance, but the rebate will be only based on target amount, not
  actual sales value.  The credit will be issued against BDX H2/2003
  market expense activities.
| |    |                                                                                                                                                                                                                                                                            
| | e  | At end of
  Q4, Optibase will issue rebate if BDX complete H2 target. The credit will be
  issued against BDX H1/2004 market expense activities.                                                                                                                           
| |    |                                                                                                                                                                                                                                                                            
| | f. | The 2003 quota for BDX is as below:                                                                                                                                                                                                                                        
| |    | Q1:
  $450k                                                                                                                                                                                                                                                                
| |    | Q2:
  $660k                                                                                                                                                                                                                                                                
| |    | Q3:
  $830k                                                                                                                                                                                                                                                                
| |    | Q4:
  $1060k                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                            
| | g. | Therefore,
  if BDX hit H1 target $1110k, Optibase will release $33.3k credit to BDX, and
  if BDX complete annual target at end of Q4, the $33.3k will be deducted from
  total yearly rebate amount.                                                                     
| |    |                                                                                                                                                                                                                                                                            

Product
literature (manuals, installation guide)
Optibase will pay 100% of translation of the product literature for
open systems (MM, CM, Composer), John Long will take care of this (max. $3k)
and will make this available from our website. The production on CD or on paper
will be made by BDX.

Local product brochures, marketing
literature
BDX will pay 100% of these materials, since they form part of the local
market approach.

Roadshow
Optibase will pay 50% of a planned roadshow in Q1, up to a maximum of
$5k

CCBN
Optibase will pay 50% of CCBN in Q1, up to a maximum of $12k

Page 2 of 3

---

---

Other marketing and PR activities
Optibase will make available an additional budget of $2.5k per quarter
for unforeseen marketing circumstances. 
BDX can apply for this budget and Optibase will consider the extra
expense.

3.     Inventory

1) Optibase will increase the credit of
$30k to $100k

2) BDX will hold 40 Publisher LE in separate inventory in custody for
Optibase as collateral for credit until the first credit line of $100k is
closed, before end of Q2.

3) Upon closure of the $100k credit, Optibase will release the
Publisher LEs..

4) After the first credit line of $100k with the Publisher LE as
collateral has been closed, BDX can apply for a new credit line for which no
collateral will be required.

4.     
Optibase Warranty China

Optibase will introduce a special and unique extended warranty program
in addition to the special repair price that has been introduced in the past.

Based on your request we will provide 2 year warranty on PCI boards for
your current stock and for new orders from October 1st. with shipment to Beijing.

BDX will need to provide statistics of their test results of boards
upon arrival, say within 48 hours.

If RMA goes over 3%, an immediate analysis will be started between 1
designated English speaking person at BDX and Optibase.

Should the cause be due to production faults, then Optibase will take
responsibility for replacement as usual.

As Mr Feng has already agreed to this, the remaining action is the
following:

Action:Please provide us a full list of
serial numbers of boards on stock.

5.     Other
Based on both parties understanding Optibase
will take different sales model to run MGW5100 business in China.

Optibase favourably looks into establishing Optibase China LTD, but
believes that the above points are more urgent and do not depend on the
distributor relationship.

Optibase is still studying the concept of a separate company that will
import technology and help distribute Chinese technology elsewhere.  This study will take time and we are
awaiting more detailed information.

|Optibase Ltd. /s/ | Beijing Digital Express Center /s/
|----------------- | ----------------------------------

Page 3 of 3

---

---

EXHIBIT 4.8

To

---

---

---

Optibase Ltd.(the Company)

Letter of Indemnification(the Letter or the Indemnification Letter)

Whereas on
December 5, 2002, the General Meeting of the Company approved, following the
approval of the Companys audit committee and board of directors, to indemnify
the directors of the Company in accordance with the Companies Law, 1999 (the Companies Law), we hereby declare that:

|1. | Obligation to indemnify:        
|-- | --------------------------------
|  
|   | The Company
  hereby undertakes:
|   |                                 
|   | 1.1.                            
|   |                                 
|   |                                 
|   |                                 
|   |                                 

---

---

|   |                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | 
|-- | -------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|   | 1.2.                                                                                                                 | The
  aggregate and accumulated indemnification amount that the Company shall pay
  to its Officers (in addition to sums that may be received from insurance
  companies in connection with insurance policies that the Company has
  purchased) pursuant to all the letters of indemnification that shall be
  issued by the Company pursuant to the indemnification decision, in connection
  with one or more of the types of events that are specified in Attachment A,
  shall not exceed the higher of: (i) 25% of the shareholders equity of the
  Company, as set forth in the Companys most recent consolidated financial
  statements prior to such payment; (ii) 7.5 million US Dollars (hereinafter The Maximum Indemnification Amount).
|   |                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | 
|   | 1.3.                                                                                                                 | In the event
  the indemnification amount the Company is required to pay to its Officers, as
  set forth in Section 1.1 above, exceeds in a certain time the Maximum
  Indemnification Amount (as existing at that time) in accordance with Section
  1.2 above, the Maximum Indemnification Amount or its remaining balance will
  be divided between the Officers entitled to indemnification, in the manner
  that the amount of indemnification that each of the Officers will actually
  receive will be calculated in accordance to the ratio between the amount each
  individual Officer may be indemnified for, and the aggregate amount that all
  of the relevant Officers involved in the event may be indemnified for.                     
|   |                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | 
|   | 1.4.                                                                                                                 | Upon the
  occurrence of an event that by its virtue you are likely to be entitled to
  indemnification in accordance with Section 1.1 above, except for a criminal
  proceedings which require a criminal intent, the Company shall place at your
  disposal, from time to time, the funds required to cover the expenditures and
  payments that are connected to handling the legal proceeding, in a manner
  that you shall not be required to pay for, or personally finance the legal
  expenses, subject to the conditions and instructions in this Indemnification
  Letter.                                                                                                                                                                    
|   |                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | 
|   | 1.5.                                                                                                                 | In order to
  avoid any doubt, upon the occurrence of an event that may entitle you to
  indemnification, you shall be entitled to appoint an advocate of your choice,
  with the exception of an advocate whom the Company deems unacceptable for
  reasonable cause, provided that you shall immediately inform the Company of
  the identity of the advocate, when it becomes necessary to appoint such
  advocate. In the event you do not inform the Company regarding your choice of
  advocate in compliance with the above mentioned, the Company shall have
  discretion to appoint an advocate on your behalf.                                                                                                                                
|   |                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|2. | The obligation to indemnify in accordance with this Letter is subject
  to the statements set forth in this Section:
|   |                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   | 2.1.                                                                                                                 | You shall
  inform the Company of every legal proceeding that shall be brought against
  you in connection with any event that may entitle you to indemnification, and
  of every warning made to you in writing, pertaining to legal proceedings that
  may be commenced against you, and this shall be done in a timely manner, immediately
  after you shall first be aware of such, and you shall provide the Company or
  to whom the Company shall instruct you to, all documents in connection with
  such proceedings.                                                                                                                                                                                                                          

2

---

---

| | 2.2. | Despite the
  provisions of Section 1.5 above, the Company is entitled to take upon itself
  the care of your defense in the legal proceeding and/or to give the above
  care to any prominent advocate that the Company shall select for this purpose
  (except an advocate that shall not be reasonably acceptable to you) subject to
  the fulfillment of all of the following conditions:  (a) The Company shall inform the holder of this Indemnification
  Letter, within 45 days from the time of receiving the notice as said in
  Section 2.1 above (or within a shorter period of time  if the matter
  requires filing a statement  of
  defense or a response to a proceeding), that it shall indemnify the holder of
  the Indemnification Letter according to this Letter; and  (b) The legal proceeding against the
  holder of the Indemnification Letter shall solely entail a claim for monetary
  damages.  The Company and/or the
  aforementioned advocate shall be entitled to act with their exclusive
  discretion and to bring the proceeding to a close; the appointed advocate
  shall act and shall owe its duty of loyalty to the Company and to you.  In the event that a conflict of interest
  shall arise between you and the Company, you shall inform the Company of such
  conflict and shall be entitled to appoint an advocate on your behalf, and the
  provisions of this Indemnification Letter shall apply to expenses you may
  incur as a result of such appointment. 
  In the event that the Company decides to settle a monetary obligation
  or to decide a monetary obligation by arbitration, the Company shall be
  entitled to do so as long as the lawsuit or the threat of a lawsuit against
  you shall be fully withdrawn. Following the request of the Company you shall
  sign any document that shall empower the Company and/or an advocate as
  mentioned above, to act on your name with regard to your defense in the
  above-mentioned proceedings and to represent you in all matters pertaining to
  these proceedings, as set forth above.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | 2.3. | You shall
  cooperate with the Company and/or with any advocates as set forth above in
  every reasonable manner that shall be required from you by any of them in
  connection with the handling of such legal proceedings, all in accordance
  with Section 1.2 above. You shall not bear any additional legal expenses due
  to such cooperation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | 2.4. | Your
  indemnification in connection to the legal proceeding of any actions against
  you, as set forth in this Letter, will not be enforceable in connection with
  amounts that you shall be required to pay as a result of a settlement or
  arbitration, unless the Company agrees, in advance and in writing, to the
  settlement, or to the of the arbitration award.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | 2.5. | The Company
  shall not be required to pay, according to this Letter, moneys that were
  actually paid, to you, or on your behalf or in your stead, through an
  insurance policy (that the Company procured) or through an obligation to any
  indemnification that was made by any other person other than the
  Company.  In order to avoid any doubt,
  it shall be clarified that the indemnification amount according to this
  Letter shall be independent of, (and in addition) to the amount that shall be
  paid (if paid) pursuant to an insurance policy and/or any other
  indemnification.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

3

---

---

|   | 2.6.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | Upon your
  request to an execution of a payment in connection to any event according to
  this Letter, the Company shall take all necessary steps according to the law
  to pay such payment and will do all that is required to obtain any approval
  that is required. If any approval is required for the above payment and that
  payment shall not be approved for any reason, such payment, or any part of
  it, that will not be approved, as said above, shall be subject to the
  approval of a court and the Company shall take all necessary steps to attain
  the courts approval.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|3. | The
  obligations of the Company according to this Letter shall remain valid even
  if you have ceased to be an Officer of the Company, provided that acts for
  which you are given a commitment of indemnification were performed or shall
  be performed during your employment as an Officer of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|4. | In the event
  that the Company shall pay to you or in your place any amount pertaining to
  this Letter in connection to a legal proceeding as said above, and afterwards
  it shall be determined that you are not entitled to any indemnification from
  the Company for any reason whatsoever, the sums paid by the Company shall be
  considered a loan that was granted to you by the Company, and shall be linked
  to the Consumer Price Index and accrue interest in accordance with the Income
  Tax Regulations (Determination of the interest rate), 1985, as amended from
  time to time. You will be required to repay these sums to the Company when
  requested to do so in writing by the Company and in accordance with a payment
  schedule that the Company shall determine.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|5. | In this
  Indemnification Letter-                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | The Companies Law- the Companies Law ,
  1999, as will be valid from time to time.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | Officer in accordance with its meaning
  in the Companies Law, including a senior 
  employee of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | Action or any derivative of it including
  a decision or a failure to act and including your Actions before the date of
  this Letter of Indemnification that were made during your term of employment
  as an Officer in the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | This Letter
  shall be neutral with regard to gender.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|6. | The
  obligations of the Company according to this Letter of Indemnification shall
  be interpreted broadly and in a manner that shall facilitate its execution,
  to the extent permitted by law, and for the purposes for which it was
  intended.  In the event of a conflict
  between any provision of this Letter and any provision of the law, said
  provision of the law shall supersede the specific provision in this Letter,
  but shall not limit or diminish the validity of the remaining provisions of
  this Letter.                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|7. | The
  Attachment to this Letter is an integral and inseparable part of it.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

4

---

---

|In witness
  whereof, the Company shall execute this Indemnification Letter by its
  authorized signatories that have been duly appointed.
|------------------------------------------------------------------------------------------------------------------------------------------



---

| | Optibase Ltd.
| | -------------

I hereby
confirm receiving this Letter and consent to all its terms.



---

Officer

Date: __________

5

---

---

Attachment

Subject to any provision of the law, the events are as follows:

|1.  | Any issuance
  of securities, including without limitation, a public offering pursuant to a
  prospectus, a private offering, the issuance of bonus shares or any offer of
  securities in any other manner;                                                                                                                                                                                                                                                                                                                       
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|2.  | A
  Transaction within the meaning of Section 1 of the Companies Law[1],
  including without limitation a transfer, sale or purchase of assets or liabilities,
  including securities, or the grant or receipt of a right to any of the
  foregoing, and any act directly or indirectly involved in such Transaction;                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|3.  | Report or
  notice filed in accordance with any applicable law, including the Companies
  Law and/or the Israeli Securities Law of 1968, and/or the Securities Exchange
  Act of 1933 and/or the Securities Exchange Act of 1934 including regulations
  promulgated thereunder, or in accordance with rules or instructions
  prevailing on an Israeli stock exchange or on Nasdaq-NM, or a stock exchange
  outside of Israel, or any law of another country regulating similar matters
  and/or the omission to act accordingly;
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|4.  | Any
  resolution with respect to distribution, as defined in the Companies Law;                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|5.  | Amendment to
  the Companys structure or its reorganization or any resolution with respect
  to such matters, including without 
  limitation, a merger, split, change in the Companys capital
  structure, incorporation of subsidiaries, dissolution or sale thereof, issuance
  or distribution;                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|6.  | The making
  of any statement, including a bona fide statement or opinion made by an
  officer of the Company in such capacity, including during meetings of the
  Board of Directors or any committee thereof;                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|7.  | An act in
  contradiction to the articles or memorandum of association of the Company;
  and                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|8.  | Any of the
  foregoing events relating to the capacity of such officer as an officer of a
  corporation controlled by the Company or otherwise affiliated therewith.                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|9.  | Any action
  or decision in relation to employer-employee relations, including the
  negotiation for, signing and performance of individual or collective
  employment agreements and other employees benefits (including allocation of
  securuties to employees).                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|10. | Any action
  or decision in relation to work safety and/or working conditions.                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|11. | Negotiation
  for, signing and performance of insurance policy.                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

---

|1 | Article 1 of the Companies
  Law defines Transaction as a contract or engagement or a unilateral decision
  of the company regarding a grant of a right or another benefit.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

---

EXHIBIT 4.9

To
___________
___________
___________

Optibase Inc.(the Company)

Letter of Indemnification(the Letter or the Indemnification Letter)

Whereas on February 20, 2003 the Companys board of directors approved
to indemnify the directors and officers of the Company to the maximum extent
and in the manner permitted by the California Corporation Code;

we hereby declare that:

|1. | Obligation to indemnify:        
|-- | --------------------------------
|   |                                 
|   | The Company
  hereby undertakes:
|   |                                 
|   | 1.1.                            
|   |                                 
|   |                                 
|   |                                 
|   |                                 

---

---

| |      | 1.1.2.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | Reasonable
  litigation fees and expenses, including attorneys fees and amount paid in
  settlement, incurred or imposed on you by a court, in a proceeding initiated
  against you by the Company or in its name or by another person, or in a
  criminal proceeding from which you are acquitted, or in a criminal proceeding
  in which you are convicted, provided that the crime for which you are
  convicted does not require a finding of criminal intent, and provided that
  you acted in good faith and in a manner you believed to be in the best
  interest of the Company.
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | 1.2. | The
  aggregate and accumulated indemnification amount that the Company shall pay
  to its directors and officers (in addition to sums that may be received from
  insurance companies in connection with insurance policies that the Company
  has purchased) pursuant to all the letters of indemnification that shall be
  issued by the Company pursuant to the indemnification decision, in connection
  with one or more of the types of events that are specified in Attachment A,
  shall not exceed the higher of: (i) 25% of the shareholders equity of the
  Company, as set forth in the Companys most recent consolidated financial
  statements prior to such payment; (ii) 7.5 million US Dollars (hereinafter The Maximum Indemnification Amount).                                            
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | 1.3. | In the event
  the indemnification amount the Company is required to pay to its directors
  and officers, as set forth in Section 1.1 above, exceeds in a certain time
  the Maximum Indemnification Amount (as existing at that time) in accordance
  with Section 1.2 above, the Maximum Indemnification Amount or its remaining
  balance will be divided between the directors and officers entitled to
  indemnification, in the manner that the amount of indemnification that each
  of the directors and officers will actually receive will be calculated in
  accordance to the ratio between the amount each individual director and/or
  officer may be indemnified for, and the aggregate amount that all of the
  relevant directors and/or officers involved in the event may be indemnified
  for.
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | 1.4. | Upon the
  occurrence of an event that by its virtue you are likely to be entitled to
  indemnification in accordance with Section 1.1 above, except for a criminal
  proceedings which require a criminal intent, the Company shall place at your
  disposal, from time to time, the funds required to cover the expenditures and
  payments that are connected to handling the legal proceeding, in a manner
  that you shall not be required to pay for, or personally finance the legal
  expenses, subject to the conditions and instructions in this Indemnification
  Letter.                                                                                                                                                                                                                              
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | 1.5. | In order to
  avoid any doubt, upon the occurrence of an event that may entitle you to
  indemnification, you shall be entitled to appoint an advocate of your choice,
  with the exception of an advocate whom the Company deems unacceptable for
  reasonable cause, provided that you shall immediately inform the Company of
  the identity of the advocate, when it becomes necessary to appoint such
  advocate. In the event you do not inform the Company regarding your choice of
  advocate in compliance with the above mentioned, the Company shall have
  discretion to appoint an advocate on your behalf.                                                                                                                                                                                          
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

2

---

---

|2. | The obligation to indemnify in accordance with this Letter is subject
  to the statements set forth in this Section:
|-- | --------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                     
|   | 2.1.                                                                                                                
|   |                                                                                                                     
|   | 2.2.                                                                                                                
|   |                                                                                                                     
|   | 2.3.                                                                                                                

3

---

---

| | 2.4. | Your
  indemnification in connection to the legal proceeding of any actions against
  you, as set forth in this Letter, will not be enforceable in connection with
  amounts that you shall be required to pay as a result of a settlement or
  arbitration, unless the Company agrees, in advance and in writing, to the
  settlement, or to the of the arbitration award.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | 2.5. | The Company
  shall not be required to pay, according to this Letter, moneys that were
  actually paid, to you, or on your behalf or in your stead, through an
  insurance policy (that the Company procured) or through an obligation to any
  indemnification that was made by any other person other than the
  Company.  In order to avoid any doubt,
  it shall be clarified that the indemnification amount according to this
  Letter shall be independent of, (and in addition) to the amount that shall be
  paid (if paid) pursuant to an insurance policy and/or any other
  indemnification.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | 2.6. | Upon your
  request to an execution of a payment in connection to any event according to
  this Letter, the Company shall take all necessary steps according to the law
  to pay such payment and will do all that is required to obtain any approval
  that is required. If any approval is required for the above payment and that
  payment shall not be approved for any reason, such payment, or any part of
  it, that will not be approved, as said above, shall be subject to the
  approval of a court and the Company shall take all necessary steps to attain
  the courts approval.   If a claim duly
  made is not paid in full by the Company within forty-five (45) days after the
  written request for payment thereof has first been received by the Company,
  you may, but need not, at any time thereafter bring an action against the
  Company to recover the unpaid amount of the claim and, you shall also be
  entitled to be paid for the expenses (including attorneys fees) of bringing
  such action (unless the action were frivolous or were not brought in good
  faith).  It shall be a defense to any
  such action (other than an action brought to enforce a claim for expenses
  incurred in connection with any action or proceeding in advance of its final
  disposition) that you have not met the standards of conduct which make it
  permissible under applicable law for the Company to indemnify you for the
  amount claimed, and you shall be entitled to receive interim payments of
  expenses pursuant to Section 1.4) unless and until such defense may be
  finally adjudicated by court order or judgment from which no further right of
  appeal exists.  It is the parties
  intention that if the Company contests your right to indemnification, the
  question of your right to indemnification shall be for the court to decide,
  and neither the failure of the Company (including its Board of Directors, any
  committee or subgroup of the Board of Directors, independent legal counsel,
  or its shareholders) to have made a determination that indemnification of you
  is proper in the circumstances because you have met the applicable standard
  of conduct required by applicable law, nor an actual deter­mination by the
  Company (including its Board of Directors, any com­mittee or sub­group of the
  Board of Directors, independent legal counsel, or its shareholders) that you
  have not met such applicable standard of conduct, shall create a presumption
  that you have or have not met the applicable standard of conduct.

4

---

---

|   | 2.7.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | Both the
  Company and you acknowledge that in certain instances, U.S. federal law or
  applicable public policy may prohibit the Company from indemnifying its direc­tors
  and officers under this Letter or otherwise. 
  You understand and acknowledge that the Company and/or its parent
  holding company has under­taken or may be required in the future to undertake
  with the U.S. Securities and Exchange Commission to submit the question of
  indemnification to a court in certain circum­stances for a determination of
  the Companys right under public policy to indem­nify you.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|3. | The
  indemnification provided by this Letter shall not be deemed exclusive of any
  rights to which you may be entitled under the Companys Articles of Incorpo­ra­tion,
  its By-laws, any agreement, any vote of shareholder or dis­interested
  directors, the California Corporation Code, or otherwise, both as to action
  in your offi­cial capacity and as to action in another capacity while hold­ing
  such office.  The obligations of the
  Company according to this Letter shall remain valid even if you have ceased
  to be a director and/or an officer of the Company, provided that acts for
  which you are given a commitment of indemnification were performed or shall
  be performed during your employment as a director and/or an officer of the
  Company.         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|4. | In the event
  that the Company shall pay to you or in your place any amount pertaining to
  this Letter in connection to a legal proceeding as said above, and afterwards
  it shall be determined that you are not entitled to any indemnification from
  the Company for any reason whatsoever, the sums paid by the Company shall be
  considered a loan that was granted to you by the Company, and shall be linked
  to the Consumer Price Index and accrue interest in accordance with the Income
  Tax Regulations (Determination of the interest rate), 1985, as amended from
  time to time. You will be required to repay these sums to the Company when
  requested to do so in writing by the Company and in accordance with a payment
  schedule that the Company shall determine.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|5. | In this
  Indemnification Letter-                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | Action or any derivative of it- including
  a decision or a failure to act and including your Actions before the date of
  this Letter of Indemnification that were made during your term of employment
  as an Officer in the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | fines shall include any excise taxes
  assessed on you with respect to an employee benefit plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | serving at the request of the Company shall
  include any service as a direc­tor, officer, employee or agent of the Company
  which imposes duties on, or involves services by, such director, officer,
  employee or agent with respect to an employee benefit plan, its participants,
  or beneficiaries.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | This Letter
  shall be neutral with regard to gender.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

5

---

---

|6.                                                                                                                                         | Nothing in
  this Letter is intended to require or shall be construed as requiring the
  Company to do or fail to do any act in violation of applicable law.  The Companys inability, pursuant to court
  order, to perform its obligations under this Letter shall not constitute a
  breach of this Letter. The provisions of this Letter shall be severable as
  provided in this Section 6.  If
  this Letter or any portion hereof shall be invalidated on any ground by any
  court of competent juris­diction, then the Company shall nevertheless
  indemnify you to the full extent permitted by any applicable portion of this
  Letter that shall not have been invalidated, and the balance of this Letter
  not so invali­dated shall be enforceable in accor­dance with its terms.
|------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|7.                                                                                                                                         | The
  obligations of the Company according to this Letter of Indemnification shall
  be interpreted broadly and in a manner that shall facilitate its execution,
  to the extent permitted by law, and for the purposes for which it was
  intended.  In the event of a conflict
  between any provision of this Letter and any provision of the law, said
  provision of the law shall supersede the specific provision in this Letter, but
  shall not limit or diminish the validity of the remaining provisions of this
  Letter.                                                                                                                                                                                                                                                            
|                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|8.                                                                                                                                         | The
  Attachment to this Letter is an integral and inseparable part of it.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|9.                                                                                                                                         | You and the
  Company each hereby irrevocably consent to the jurisdiction of the courts of
  the State of California for all purposes in connection with any action or
  proceeding which arises out of or relates to this Letter and agree that any
  action instituted under this Letter shall be brought only in the state courts
  of the State of California.                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.                                                                                                                                        | This Letter
  shall be governed by and its provisions construed in accordance with the laws
  of the State of California as applied to contracts between California
  residents entered into and to be performed entirely within California.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|In witness
  whereof, the Company shall execute this Indemnification Letter by its
  authorized signatories that have been duly appointed.

__________________________

Optibase
Inc.

I hereby confirm receiving this Letter and consent to all its terms.

__________________

director/officer

Date: __________

6

---

---

Attachment

|Subject to
  any provision of the law, the events are as follows:
|-----------------------------------------------------------------
|                                                                 
|1.                                                               
|                                                                 
|2.                                                               
|                                                                 
|3.                                                               
|                                                                 
|4.                                                               
|                                                                 
|5.                                                               
|                                                                 
|6.                                                               
|                                                                 
|7.                                                               
|                                                                 
|8.                                                               
|                                                                 
|9.                                                               
|                                                                 
|10.                                                              
|                                                                 
|11.                                                              

* * *

---

---

EXHIBIT 8.1

LIST OF SUBSIDIARIES
OF OPTIBASE LTD.

|Name of
  subsidiary |  | Place of
  Incorporation  |  | Ownership
  rights
|-------------------- |  | ------------------------- |  | ------------------
|Optibase,
  Inc      |  | California, United States |  | 100%              
|Optibase
  B.V.      |  | Netherlands               |  | 100%              

---

---

Exhibit 10.5

CONSENT OF INDEPENDENT AUDITORS

We consent to the incorporation by reference
in the Registration Statements on Form S-8 File No. 333-10840 pertaining to the
1994 Share Option Plan, the 1999 Israeli Share Option Plan and 1999 U.S. Share
Option Plan, on Form S-8 File No. 333-12814 pertaining to the 1994 Share Option
plan, the 1999 Israeli Share Option Plan, as amended, the 1999 U.S. Share
Option Plan, as amended, the 102 Share Option Plan (1999) and 2000 Employees
Share Purchase Plan, on Form S-8 File No. 333-13186 pertaining to the
ViewGraphics, Inc, 1992 Stock Option plan and on Form S-8 File No. 333-91650
pertaining to the 1999 Share Option Plan, the 1999 U.S. Israel Plan, the 102
Plan, the 2001 Nonstatutory Share Option Plan, as amended and 2000 Employees
Share Purchase Plan of Optibase Ltd. of our report, dated February 10, 2003,
with respect to the consolidated financial statements of Optibase Ltd.,
included in the Annual Report (Form 20-F) for the year ended December 31, 2002.

|Tel-Aviv, Israel | KOST FORER & GABBAY             
|---------------- | --------------------------------
|June, 30 2003    | A Member of Ernst & Young Global

---

---

EXHIBIT 10. 6

CERTIFICATION
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In
connection with the Annual Report of Optibase Ltd. (the Company) on Form
20-F for the period ending December 31, 2002, as filed with the Securities and
Exchange Commission on the date hereof (the Report), the undersigned hereby
certifies that to the best of my knowledge:

1.     The
Report fully complies with the requirements of Section 13(a) of the Securities
Exchange Act of 1934; and

2.     The
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company.

Date: June 30, 2003

| | /s/ Tom Wyler                  | 
| | ------------------------------ | 
| | Name: Tom Wyler                | 
| | Title: Chief Executive Officer | 

---

---

CERTIFICATION
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In
connection with the Annual Report of Optibase Ltd. (the Company) on Form 20-F
for the period ending December 31, 2002, as filed with the Securities and
Exchange Commission on the date hereof (the Report), the undersigned hereby
certifies that to the best of my knowledge:

1.     The
Report fully complies with the requirements of Section 13(a) of the Securities
Exchange Act of 1934; and

2.     The
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company.

Date: June 30, 2003

| | /s/ Zvi Halperin                 | 
| | -------------------------------- | 
| | Name: 
  Zvi Halperin            | 
| | Title: Chief
  Financial Officer | 

2

---

---