20-F 1 zk40887.htm

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

Form 20-F

(Mark One)

o	REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

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

For the fiscal year ended December 31, 2003.

OR

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

For the transition period from _______________ to _______________

Commission file number 000-29736

Marnetics Broadband Technologies Ltd.
(Exact Name of Registrant as specified in its charter)

Not applicable
(Translation of Registrant’s name into English

Israel
(Jurisdiction of incorporation or organization)

10 Hayezira Street Ra’anana 43000 Israel

(Address of principal executive offices)

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

Title of each Class		Name of each exchange on which registered

None

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

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

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

None
(Title of Class)

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

As of December 31, 2003, 7,362,390 of the Registrant’s Ordinary Shares, par value NIS 0.08 per share, were issued and outstanding.

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

Yes x No o

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

Item 17 o Item 18 x

TABLE OF CONTENTS

		PAGE

PART I

Item 1:	Identity of Directors, Senior Management and Advisers	4
Item 2:	Offer Statistics and Expected Timetable	4
Item 3:	Key Information	4
Item 4:	Information on the Company	11
Item 5:	Operating and Financial Review and Prospects	22
Item 6:	Directors, Senior Management and Employees	32
Item 7:	Major Shareholders and Related Party Transactions	40
Item 8:	Financial Information	47
Item 9:	The Offer and Listing	54
Item 10:	Additional Information	56
Item 11:	Quantitative and Qualitative Disclosures about Market Risk	66
Item 12:	Description of Securities Other than Equity Securities	66

PART II

Item 13:	Defaults, Dividend Arrearages and Delinquencies	66
Item 14:	Material Modifications to the Rights of Security Holders and Use of Proceeds	66
Item 15:	Controls and Procedures	66
Item 16A:	Audit Committee Financial Expert	67
Item 16B:	Code of Ethics	67
Item 16C.	Principal Accounting Fees and Services	67
Item 16D.	Exemptions from Listing Requirements of Audit Committee	68
Item 16E.	Purchase of Equity Securities by Issuer and Affiliated Purchasers	68

PART III

Item 17:	Financial Statements	68
Item 18:	Financial Statements	68
Item 19:	Exhibits	68
Signature		70

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

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

Note Regarding Forward-Looking Statements

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

PART I

Item 1. Identity of Directors, Senior Management and Advisers

Not Applicable.

Item 2. Offer Statistics and Expected Timetable

Not Applicable.

Item 3. Key Information.

A. Selected Financial Data

The following selected summary of financial information was derived from our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. Effective December 31, 2000, Marnetics Ltd. was acquired by the Company (formerly named Stav Electrical Systems (1994) Ltd.) in exchange for which the Company issued to the shareholders and option holders of Marnetics Ltd. shares and options in the Company representing approximately 75% of its outstanding shares, on a fully diluted basis. The acquisition of Marnetics Ltd. by the Company was accounted for as a reverse acquisition. Marnetics Ltd. was determined to be the “accounting acquirer” in the transaction since the former shareholders and option holders of Marnetics Ltd., as a group, received the largest ownership interest in the Company. As a result, the historical financial statements of the Company prior to December 31, 2000 were replaced with the historical financial statements of Marnetics. The statement of operations for 2003, 2002 and 2001 includes the operations of the Company and of Marnetics. The December 31, 2003, December 31, 2002 and December 31, 2001 balance sheet includes the consolidated accounts of the Company and Marnetics.

At the annual shareholders meeting on March 12, 2004, the Company’s operational plan for the year 2004 was approved. It made provision for steps to begin liquidation of the Company. (See “Item 8B – Significant Changes.”) It is currently examining the possibility of terminating the registration of its ordinary shares under the Securities Exchange Act of 1934, hence ceasing its reporting obligations to the Securities Exchange Commission. The Company has been in on-going serious discussions throughout the second quarter of year 2004 with a with a third party acquirer interested in purchasing a controlling share in the Company. (See “Item 8B – Significant Changes.”) There can be no assurance that the potential investor will agree to purchase a controlling share in the Company or that the conditions to closing of such transaction (which will require shareholder approval) will be obtained.

The Company will make the required notifications and filings in accordance with the course of action that it shall adopt. It should be noted that if the Company will terminate the registration of its ordinary shares, certain information regarding the Company would no longer be available nor would it continue to be in its current form. Nevertheless, if registration is terminated, the Company will continue to be a public company under the Israeli Companies Law, and as such would still be required to prepare annual financial statements, have External Directors serving on its Board and Audit Committee, and all other requirements as detailed under the Company’s Law regarding public companies.

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

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

	Year ended December 31,									Cumulative from June 1, 1998 date of (commencement of operations) to December 31, ⁽¹⁾

	2 0 0 3			2 0 0 2			2 0 0 1			2 0 0 3


Revenue	$	4		$	19		$	-			$	23

Research and development		210			486			812				1,924
Sales and marketing expenses		174			464			310				1,090
General and administrative expenses		434			784			1,128				3,293
Provision for legal claim		-			(500	)		750				250
Impairment of goodwill		-			-			9,309				9,309
Loss allowance on loan to related party		-			-			1,228				1,228
Collection of loan from related party		-			(266	)		-				(266	)
Write-down of investment in affiliate		60			522			-				582
Provision for a bank guarantee		-			716			-				716
Non-cash compensation expenses		792			792			805				4,797

Total costs and expenses		1,670			2,998			14,342				22,923

Operating loss		(1,666	)		(2,979	)		(14,342	)			(22,900	)

Financial income (loss), net		(101	)		32			175				290
Loss on sale of fixed assets		-			-			-				(28	)
Taxes on income		-			(74	)		-				(74	)
Share in losses of affiliate		-			-			-				(660	)

Loss for the period	$	(1,767	)	$	(3,021	)	$	(14,167	)		$	(23,372	)


Discontinued operations
Loss from operations of electrical division		-			-			(450	)			(450	)
Loss on sale of electrical division		-			-			(2,278	)			(2,278	)

Loss for the period	$	(1,767	)	$	(3,021	)	$	(16,895	)		$	(26,100	)


Per share data (basic and diluted)
Loss from continuing operations	$	(0.24	)	$	(0.41	)	$	(2.11	)

Loss from discontinued operations	$	-		$	-		$	(0.40	)

Loss for the period	$	(0.24	)	$	(0.41	)	$	(2.51	)


Number of Shares used in computing loss per share (basic and diluted)		7,362,390			7,362,390			6,725,685

	Balance Sheet Data at December 31, US $ in thousands

	2003		2002	2001		2000

Working capital	(859	)	3	1,652	*	4,925
Total assets	398		1,485	3,451	*	25,376
Short term credits and current maturities of long- term debt	--		--	50		3,337
Long-term debt	--		--	--		213
Shareholders’ equity	(767	)	208	2,437		18,527

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

B. CAPITALIZATION AND INDEBTEDNESS

Not Applicable.

C. REASONS FOR THE OFFER AND USE OF PROCEEDS

Not applicable.

D. Risk Factors

Sale of the Company; Sale of Marnetics Ltd.; Sale of Marnetics Ltd.’s Intellectual Property

At the annual general meeting of shareholders held on March 12, 2004, the shareholders of the Company approved the Company’s Operational Plan for the year 2004. If a purchaser for the Company is not found prior to March 31, 2004, then management is to begin step towards liquidation of the Company. (See “Item 8B – Significant Changes”).

The resulting lack of sales, the inability of the Company to collect outstanding debts from a major shareholder and also from the purchaser of the net assets of the electrical operations business, and lack of funding and investment in the Company during year 2003 and first half of year 2004 has caused a material adverse effect on the financial condition of the Company and forced the Company to prepare the steps necessary to initiate liquidation procedures.

As of April 26, 2003, the Company decided to lay off the majority of its employees of the Company and those of its wholly-owned subsidiary, Marnetics Ltd. in the areas of marketing, sales and research and development. The remaining employees in the area of administration have remained with the Company to implement its operational plan that reflected the reduction of the research and development, and marketing and sales, and focused on efforts to sell a controlling share in the Company, the sale of its subsidiary Marnetics Ltd. and/or of Marnetic’s intellectual property, as well as continuing the legal proceedings initiated by the Company, its defense in proceedings initiated against it and other administrative activities essential to the Company’s operations.

During year 2003 and to date the Company continued operations for the main purpose of collecting outstanding debts owed to the Company relating to the Electrical Business, which was sold during 2001. (See “Item 8B – Significant Changes.”)

By letter dated November 15, 2002, the Company was advised that its status was not in compliance with certain of the standards of the American Stock Exchange (the “Exchange”), namely 1) the aggregate market value of the shares publicly held was less than $1 million for more than 90 consecutive days and, 2) the common stock had been selling for a substantial period of time at a low price per share. As a consequence, the Exchange considered suspending dealing in, or removing the common shares from the list. The Company was offered an opportunity to submit a plan which would demonstrate an ability to regain compliance with the continued listing standards. Such a plan was submitted on December 23, 2002 and revised on January 13, 2003.

On January 31, 2003, the Exchange communicated to the Company that it had completed its review and determined to initiate de-listing proceedings. By correspondence dated February 6, 2003, the Company appealed the Exchange’s determination and, in written submission dated March 9, 2003, the Company provided information in support of its request for review. On March 25, 2003, a hearing was held before an Exchange Listing Qualifications Panel. By letter dated March 26, 2003, the Exchange notified the Company of the Panel’s determination that the Company’s common stock should be de-listed by the Exchange. The AMEX suspended trading in the Company’s common stock effective April 1, 2003 and the Company did not appeal the Panel’s decision. As from April 1, 2003 the Company’s shares began to be quoted on the Pink Sheets. (See “Item 9B – Listing – Markets.”)

In order to determine the value of Marnetics Ltd. and/or value of the assets of the Company including the intellectual property, the Company invited a valuation from a well known consulting firm during year 2003. The Company is continually seeking a potential investor or purchaser in selected and, if possible, synergetic markets and throughout the year 2003 and the first half of year 2004 has engaged in exploratory discussions with potential purchaser and/or merger candidates. Beginning in June 2003 the Company entered into negotiations with a past distributor of Marnetics products in Israel, regarding a merger of the two companies and/or possible sale of the intellectual property assets of the Marnetics but to date such negotiations have not materialized.

During the first half of year 2004 and prior to March 31, 2004, the Company has entered into serious negotiations with a third party acquirer interested in purchasing a controlling share of the Company. There can be no assurance that the potential investor will agree to purchase a controlling share in the Company or that the conditions to closing of such transaction (which will require shareholder approval) will be obtained. Failure to consummate negotiations for the purchase of the controlling shares would result in the Company initiating steps to begin liquidation and the termination of the registration of its ordinary shares under the Securities Exchange Act of 1934.

Intellectual Property Rights

As part of the steps towards liquidation of the Company for the year 2004, the Company is seeking to sell its intellectual property. Negotiations for its sale were held with a distributor of the Company, but to date such negotiations have not yielded results. If the Company fails to obtain an investor in the Company or sell the subsidiary, Marnetics Ltd., the Company will continue its attempts to sell the intellectual property.

The Company received funding under Government of Israel programs for research and development programs which have now been halted. In order to maintain eligibility for these programs, the Company must continue to meet specified conditions and pay royalties with respect to grants received. In addition, some of the Office of the Chief Scientist’s programs under which we were funded restricts our ability to manufacture particular products or transfer particular technology outside of Israel. If the Company’s fails to comply with these conditions in the future, the benefits received could be canceled and the Company could be required to pay back the grants with penalties. In addition, in accordance with applicable law and the Company’s obligations towards the Office of the Chief Scientist, the Company is limited in selling certain of its intellectual property to a non-Israeli entity.

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

There can be no assurance that we would be able to or will have the financial or other resources necessary to defend infringement actions. Failure to do any of the foregoing could have a material adverse effect on us. Further more, if our products or technologies are deemed to infringe upon the rights of others, we could become liable for damages, which would have a material adverse effect on us.

Limited Relevant Operating History of Marnetics

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

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

Limited Marketing Capabilities; Dependence on Third Party Marketing Arrangements

Given the reduction in employees and limited budgeted funding during year 2003, the Company ceased marketing activities and commercialization of any of our products.

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

Dependence on Key Personnel

As of April 26, 2003, the Company decided to lay off the majority of its and those of its wholly-owned subsidiary, Marnetics Ltd. in the areas of marketing, sales and research and development. The remaining employees are in the area of administration.

The Company is dependent on the abilities and continued personal efforts of Marnetics Ltd.’s senior management, particularly those of Menachem Reinschmidt, Founder of Marnetics Ltd. and Chairman of the Board of the Company whose consulting agreement is subject to renewal, David Sheetrit the present acting Chief Executive Officer, previous Chief Operating Officer of the Company and Director in the Company since April 2003, and George Balot, Acting Chief Financial Officer since June 2003 and Director of the Company since December 2002.

Menachem Reinschmidt, David Sheetrit and George Balot have been employed under a services agreement through March 31, 2004 with the Company which was extended at a board meeting on June 30, 2004 whereby it was agreed to compensate both for their time and services rendered and expenses to the Company for the second quarter of year 2004.

It was further discussed at the board meeting on June 30, 2004: the continuation of the compensation and expenses for their services after June 30, 2004 regarding providing services in the negotiations with the potential purchaser in managing the due diligence process, the closing of the transaction, the proxy process and the annual shareholders meeting, as well as any initial steps for liquidation if the negotiations with the potential purchaser do not materialize. (See – “Item 8B Significant Changes”.)

The loss of the services of these key personnel at this time would have a material effect on the Company’s ability to manage the negotiations with the potential investors as well as the liquidation of the Company.

Control by Principal Shareholders

As of February 2, 2004, our Executive Officers and Directors and principal shareholders beneficially own an aggregate of 61.6% of the Company’s Ordinary Shares on a fully diluted basis (based on vested option, not taking into account unallocated options and options granted but not vested). Such Shareholders, if voting together, would likely have sufficient voting power to elect a majority of the Board of Directors, exercise control of the business, policies and affairs of the Company and, in general, determine the outcome of any corporate transaction or other matter submitted to Shareholders for approval such as: (i) any amendment to the Company’s Articles of Association, (ii) any merger, consolidation, sale of all or substantially all of the assets of the Company and (iii) any privatization transaction, and in general prevent or cause a change in control of the Company, all of which may adversely affect the Company and its Shareholders. In addition, certain shareholders have the right to appoint members of the Board of Directors. Although certain shareholders are contractually obligated to vote for certain director nominees, there is no joint ownership of the shares held by such shareholders under Israeli law and such shareholders do not constitute a “controlling group” under Israel corporate and securities laws , and thus are not bound to vote together as a group. See “Item 6A – Directors and Senior Management” and “Item 7-Major Shareholders and Related Party Transactions.”

Risks Relating to Collection of Debt to the Company

Effective March 2001 the Company sold to Idan Millenium Investments and Assets Ltd. (“IDAN’), a company under the control of Dov Strikovsky, a major shareholder and former President, Chairman and CEO of the Company, all the fixed assets, inventories, other assets and liabilities and related goodwill, in the amount of an appraised value of $2,000,000, relating to the electrical operations, for a consideration of $597,000. The consideration is payable in 25 monthly installments of $24,000 commencing February 1, 2002. In May 2002 the Company signed an addendum with IDAN to change the terms of payments to such that the first 11 installment will be reduced to $7,000 each and the remaining 14 installments will be of $37,000. The Company, considering the collectibility probability, decided to establish an allowance on the amount not yet collected. During 2002 $71,000 were repaid on the account of the sale consideration. In year 2004 Mr. Strikovsky is involved in legal proceedings leading towards his filing for bankruptcy. If adjudged bankrupt, this will have a direct negative impact on the ability of the Company to collect the amounts due from him. (See “Item 7B – Related Party Transactions.”)

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

To secure his obligations under the various agreements Mr. Strikovsky has collateralized 300,000 shares that he owns of the Company. No other payments were made by Mr. Strikovsky subsequent to December 31, 2002. The Company has initiated legal efforts aimed at collecting amounts due from Mr. Strikovsky and the companies under his control. In year 2004 Mr. Strikovsky is involved in legal proceedings leading towards his filing for bankruptcy. If adjudged bankrupt, this will have a direct negative impact on the ability of the Company to collect the amounts due from him. (See “Item 7B – Related Party Transactions – Indemnification by Significant Shareholder.”)

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

In addition, the Company has provided the Bank with a guarantee of up to $716,000, which decreases in the ratio of NIS 1:2 paid on account of the outstanding debt of the Municipality of Hod Hasharon, which has been assigned to the Bank (Note 10b). To date the Municipality of Hod Hasharon has not made any re-payment on account of the debt, and therefore the guarantee has not decreased. According to the terms of the Bank Agreement, following November 30, 2002, the Bank is entitled to exercise the outstanding amount of the guarantee, and since the guarantee has not decreased, the Company decided to establish an allowance for the guarantee in full.

The Company has informed the Bank that, following prolonged negotiations, the Municipality of Hod Hasharon stated its position to the effect that it is not obligated towards the Company and retains all rights in the matter, and that furthermore has, in its opinion, claims against the Company amounting to some NIS 4 Million (approximately $900,000). In light of the position taken by counsel to the Municipality, the Company informed the Bank that bringing legal action is unavoidable, and that in the opinion of the Company remains the only course of action that may result in the recovery of the funds due to it.

Therefore, the Company believed that it would be proper that the Bank join the Company in bringing such suit and share in its expense. The Bank has yet to formally respond to the Company’s suggestion, although it has learned from counsel to the Bank that it is reluctant to join the suit, but may be willing to share some of the expenses involved. The Company is of the opinion that the Bank’s position is detrimental to the Company’s efforts.

On November 20 2003, the Company’s subsidiary, Marnetics Ltd. filed suit against the Municipality of Hod Hasharon and its then head of the Engineering Department in the sum of NIS 10,000,000 (approximately $2.2 million). On March 2004, the Municipality of Hod Hasharon filed a counterclaim for NIS 4.48 million for payment in excess of work and services provided. (See “Item 8A - Legal Proceedings”.)

The setting up of a reserve for the value of the guarantee has had a negative impact on the financial condition of the Company. Failure to collect the total amounts, or part of it, from Idan Millenium Investments and Assets Ltd, Mr. Dov Strikovsky and the Municipality of Hod Hasharon can have a negative impact on financial condition the Company and on the negotiations with any potential purchaser or investor.

Risks Relating to Legal Proceedings

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

During June 2002, the plaintiff filed a request of enforcement with the District Court of Tel Aviv, Israel, asking the court to enforce the judgment against the Company and Mr. Dov Strikovsky in the amount of $725,000, in Israel.

The Company filed the appropriate papers to bring an appeal to the rejection of the motion to vacate the judgment, in July 2002.

On September 10, 2002, the District Court of Tel Aviv, Israel agreed to grant the Company an extension of thirty days to file its motion to contest the enforcement of the judgment from the date of the Israeli Court’s decision regarding the motion to dismiss the enforcement of judgment claim. The Court later denied the Company’s motion. In light of the proceedings conducted in this matter in the United States, a hearing as to the substance of the claims has not yet been held, and Company and opposing counsel have agreed, from time to time, to postpone the date of such hearing. Currently, a hearing in the case is scheduled for January 9, 2005.

On September 10 2003, the Company filed suit against Mr. Strikovsky and others in the sum of NIS 3,193,743 (approximately $700,000) due to default under loans extended to Mr. Strikovsky by the Company, as well as other debts related to the sale of its electrical business to companyies under Mr. Strikovsky’s control. On December 4, 2003, the Company was able to obtain a court order for the seizure of certain notes credited to the defendants by the Municipality of Hod Hasharon.

In year 2004 Mr. Strikovsky is involved in legal proceedings leading towards his filing for bankruptcy. If adjudged bankrupt, this will have a direct negative impact on the ability of the Company to collect the amounts due from him. There is scheduled on July 14, 2004, a hearing in court for the protection of the creditors of Mr. Strikovsky.

Risks Relating to Marnetics’ Location in Israel

Risk of Political Instability. Our principal offices and the research and development facilities of the Company are located in Israel and, thus, are directly affected by economic, political and military conditions in Israel

History of Inflation. In the early to mid-1980s, Israel’s economy was subject to a period of very high inflation. However, inflation was significantly reduced by the late 1980s due primarily to government intervention. Increases in inflation in Israel could have an adverse impact on our financial statements if the rate of inflation increases without a corresponding devaluation of the NIS against the dollar.

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

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

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

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

Item 4. Information on the Company

A. History and Development of the Company

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

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

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

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

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

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

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

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

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

At the annual shareholders meeting on March 12, 2004, the Company’s operational plan for the year 2004 was approved. It made provision for steps to begin liquidation of the Company and to cease SEC filings and reporting if a purchaser was not found prior to March 31, 2004. (See “Item 8B – Significant Changes.”) The Company has been in on-going serious discussions in the second quarter of year 2004 with a potential investor to purchase control of the Company. There can be no assurance that the potential investor will agree to purchase a controlling share in the Company or that the conditions to closing of such transaction (which will require shareholder approval) will be obtained. (See “Item 8B – Significant Changes.”)

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

B. Business Overview

The Company’s operations consisted of the core business of developing and marketing network capacity enhancement and network information analysis solutions for IP networks or the Network Business, which is handled through our wholly-owned subsidiary, Marnetics Ltd. During 2003 and throughout 2004 the Company has dealt with some legal issues and collection of debt relating to the Electrical Business, which was sold during 2001. (See “Item 8B – Significant Changes.”)

As of April 26, 2003, the Company decided to lay off the majority of the employees of the Company and those of its wholly-owned subsidiary, Marnetics Ltd. in the areas of marketing, sales and research and development The remaining employees are in the area of administration and are being compensated until end of June 2004. It was further discussed at the board meeting on June 30, 2004, the continuation of the compensation and expenses for their services after June 30, 2004 regarding providing services in the negotiations with the potential purchaser in managing the due diligence process, the closing of the transaction, the proxy process and the annual shareholders meeting, as well as any initial steps for liquidation if the negotiations with the potential purchaser do not materialize. The Company will discuss such at the next board meeting and come back to these officers with written proposals for such services.

As of March 2004, the Company has begun taking steps towards the process of liquidating the Company while at the same time, seeking a purchaser for the Company and/or its assets. (See “Item 8B – Significant Changes.”)

NETWORK BUSINESS

Current Strategy – Sale of Company; Sale of Marnetics Ltd.; Selling of Marnetics Technology

At the annual shareholders meeting on March 12, 2004, the Company’s operational plan for the year 2004 was approved. It made provision for steps to begin liquidation of the Company. (See “Item 8B – Significant Changes.”) It is currently examining the possibility of terminating the registration of its ordinary shares under the Securities Exchange Act of 1934, hence ceasing its reporting obligations to the Securities Exchange Commission. The Company has been in on-going serious discussions throughout the second quarter of year 2004 with a potential investor who is interested in purchasing control of the Company (See Item 8B – Significant Changes). There can be no assurance that the potential investor will agree to purchase a controlling share in the Company or that the conditions to closing of such transaction (which will require shareholder approval) will be obtained. Further, Marnetics is limited when negotiating the possible sale of its technology, based on the terms established in the agreement with the Office of the Chief Scientist of Israel and under applicable law, on the condition that Marnetics may not sell its intellectual property to a non-Israeli entity.

The following description of the Company’s operating subsidiary, Marnetics Ltd., relates to the stage of commercialization of its products developed between the periods 2001 through June 2003. Since then the Company has ceased the stage of commercialization.

General

In early 2001, the global telecommunications markets experienced a major decline. As a result of the downturn, the deployment of broadband Internet access slowed dramatically, putting in jeopardy Marnetics’ business plan, which primarily targeted the broadband market. As a result thereof, Marnetics Ltd. shifted its focus and developed a platform of products which it called the Prospera™ family of products, which are intended to provide network capacity enhancement and analysis solutions for bottlenecks that may occur especially when local area networks (“LAN”) meet the congested wide area network (WAN) (the WAN Access Link), thereby decreasing the usability and productivity of revenue generating mission critical applications.

Industry Background and Market Opportunity

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

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

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

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

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

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

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

Existing Alternative Solutions

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

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

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

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

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

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

Our Products and Services – Prospera™ family of products

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

The Prospera™ family of products comprises two main products:

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

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

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

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

Prospera MegaLink™

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

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

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

Market Positioning

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

The Technology

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

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

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

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

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

CisMate

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

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

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

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

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

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

Prospera Expert™

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

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

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

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

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

NetQA

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

ISP Rating

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

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

Customers and Distributors

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

In early July 2001, Marnetics signed an OEM agreement with Speedwise Technologies Ltd., a company in which Marnetics Ltd. owns a 14.73% interest as of December 31, 2002, to enable Marnetics to sell its products for cellular customers (which are currently in development), whether integrated into Speedwise’s products or as stand-alone products, to Speedwise’s installed base of approximately 40 cellular companies worldwide and a much broader network of contacts. Pursuant to this agreement, Speedwise was to pay Marnetics 30% of the income generated by the sale and maintenance of the Marnetics products. This agreement had a one-year term with automatic renewal. As of November 1, 2001, the OEM agreement was cancelled between the parties. As of December 2003 Speedwise Technologies Ltd. business operations has ceased. (See – “Item 7B Related Party Transactions”)

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

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

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

During year 2003, Marnetics has ceased marketing efforts outside of Israel and was concentrating its efforts inside Israel as well as attempted to find distributors in the United States through the agreement with RevenueTraction, LLC. After June 2003, with the firing of the marketing and sales employees, Marnetics ceased all marketing and sales efforts.

Licensing Arrangements

In April 2001, Marnetics Ltd. entered into a software license agreement with Speedwise Technologies Ltd., a company in which Marnetics Ltd. owns a 14.73% interest as of December 31, 2003. Under this license agreement, Marnetics granted Speedwise a non-exclusive license to use certain programs and software products owned by Marnetics which Speedwise is using to develop other software products. Marnetics is entitled to receive a fee based on the sale of this derivative software product of either (a) US $25 per concurrent user if sold bundled with other Speedwise products, or (b) 15% of net revenues from the product. The agreement has a perpetual term. During October 2002 Speedwise sold most of its assets and IP and the Company does not expect significant revenues from this agreement, if any. As of December 2003 Speedwise Technologies Ltd. business operations has ceased. (See “Item 7B - Related Party Transactions.”)

Competition

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

Research and Development

During April/May 2003, the Marnetics laid off the research and development employees and in June 2003 Hanoch Newman VP R&D left the Company. This has had an adverse effect on the business and operations of the Company and of Marnetics.

Previously, our research and development plan was aimed at leveraging the Marnetic’s current technology and developing the Prospera™ family of product and related products.

In May 2002, Marnetics submitted an application to obtain research and development grant in the sum of $230,000 from the Office of the Chief Scientist, of the Ministry of Industry and Trade, of the State of Israel (“OCS”) which was approved in November 2002. To date Marnetics has received a grant of $220,000. The grant is based on research and development expenses that Marnetics had actually expensed until December 31, 2003. There can be no certainty that the remaining funding will be received by Marnetics.

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

	a)	Developing the NetQA methodology, including the development of the Prospera Expert Pro, both supporting the overall revenue generating objectives.

	b)	Migration of the Prospera software to positioning as an appliance (hardware) with the CisMate to be clearly positioned to boost router performance.

	c)	The development of the ADSL FreeFlow which provides capacity enhancement functionality to ADSL connected businesses.

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

The commercial version of Prospera Expert™ (V2.1) had been intended to be completed in June 2003.

A prototype of CisMate was introduced allowing a relatively fast release of the product during Q1 of 2003 but all commercialization efforts ceased in Q2 of 2003.

Marketing, Promotional, and Consultants

In June 2003, the Company ceased marketing, promoting and retaining marketing oriented consultants.

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

In February 2002, Marnetics entered into a services agreement with Expenion LLC, to provide to Marnetics, primarily in the United States but not limited to such, on a non-exclusive basis, business development services for the sale of its products. Marketing efforts have ceased during year 2003.

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

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

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

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

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

Strategic Partnerships

Following decisions reached at the annual general meeting in November 2002, the Company had resolved to pursue alliances and partnerships with leading companies in the Network arena.

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

The opportunity of strategic cooperation had an important effect on product definition and design. As product rollout continued during Q1 and Q2 of 2003, the efforts to increase market knowledge/feedback and approach potential partners was intensified especially with the assistance of RevenueTraction, LLC. This agreement expired in May 2003.

Current Strategy – Sale of Company; Sale of Marnetics Ltd.; Selling of Marnetics Technology

As a result of the Company halting its day to day activities as of July 1, 2003, and as part of the Company’s operation plan for the year 2004, the Company has been seeking a purchaser for the Company, to sell Marnetics Ltd. and/or sell the assets of the Company, mainly Marnetic’s intellectual property. (See “Item 8B – Significant Changes.”)

In June 2003 the Company engaged in negotiations with a past distributor of Marnetics in Israel, regarding the possible a merger of Marnetics and the distributor and/or possible sale of the intellectual property assets of Marnetics. To date, no agreement has materialized. (See “Item 8B – Significant Changes.”)

In addition, during 2004, the Company has been engaged in on-going discussions with a third party acquirer interested in purchasing a controlling share in the Company. Although negotiations are at an advanced stage, there can be no assurance that the third party will agree to purchase a controlling share in the Company or that the conditions to closing of such transaction (which will require shareholder approval) will be obtained. Failure to consummate these discussions may result in the Company taking the initial steps to liquidate the Company, as provided in the Company’s operational plan. (See “Item 8B – Significant Changes.”)

ELECTRICAL BUSINESS

Prior to December 2000, the Company’s sole business was as an electrical and lighting contracting and engineering firm engaged in the installation and maintenance of infrastructure works located in the State of Israel. The Electrical Business at that time was characterized by intense competition and pricing pressures. The results of operation of the Electrical Business were materially and adversely affected by an economic slowdown and political instability in Israel. As a result and in order to enable the Company to focus on the Network Business, the Company sold the Electrical Business, effective as of March 31, 2001. (See - “Item 8B – Significant Changes.”)

C. Organizational Structure

The following is a list of the Company’s direct and indirect significant subsidiaries as of May, 2004:

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

	(1)	On fully diluted basis.

	(2)	The Company holds 450,000 Ordinary Shares of Speedwise Technologies Ltd (“Speedwise”). Speedwise entered into an agreement to sell all its assets and intellectual property to Orsus Solutions Ltd., an Israeli technology company, in exchange for the payment of cash and shares of Orsus Solutions Ltd. Speedwise ceased operations in year 2003 but still owns the shares in Orsus Solutions Ltd.. (*See “Item 7. B. Related Party Transactions”.)*

	(3)	On December 11, 2002 the Board of Directors resolved to authorize management of Marnetics to structure an Employment Stock Option Plan for the year 2003 and to allocate to employees of Marnetics up to 5 (five) per cent of the issued and outstanding share capital of Marnetics on a fully diluted basis. There was no allocation in year 2003.

D. Property, Plants and Equipment

As of December 20, 2000, the Company’s headquarters were relocated from Moshav Batzra to a facility in Ra’anana, Israel, and leased by its subsidiary Marnetics Ltd. The facility consists of approximately 232 square meters. The lease expired on May 30, 2003 and was renewed until December 2003. Agreement was reached with the landlord that Marnetics can remain rent free at the facility until a replacement tenant is found. Marnetics is just paying the city property tax on the facility.

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

Item 5. Operations and Financial Review and Prospects

The following contains forward-looking statements, which involve risks and uncertainties. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors. The following discussion and analysis of financial condition and results of operations should be read along with the accompanying Consolidated Financial Statements for the year ended December 31, 2003. (See “Item 8A –Financial Information”.) These reports are presented in United States dollars and have been prepared in accordance with US GAAP.

A. Operating Results

Overview

Marnetics Broadband Technologies Ltd. (formerly Stav Electrical Systems (1994) Ltd.) (“the Company or Stav”) has been engaged in the development of capacity enhancement and traffic analysis solutions for IP networks through its wholly owned subsidiary Marnetics Ltd. (“Marnetics”) and was engaged in the manufacture, installation and maintenance of electrical and lighting systems, mainly for public institutions

The Company’s operations during 2002 and first half of year 2003 consisted of the core business of developing and marketing network capacity enhancement and network information analysis solutions for IP networks or the Network Business, which is handled through our wholly-owned subsidiary, Marnetics Ltd. During 2003 the research development and marketing activities of our core business were halted and the Company is now engaged in efforts to sell a controlling share in the Company, the sale of its subsidiary Marnetics Ltd. and/or of Marnetic’s intellectual property, as well as continuing the legal proceedings initiated by the Company, its defense in proceedings initiated against it and other administrative activities essential to the Company’s operations. (See “Item 8B – Significant Changes.”)

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

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

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

Marnetics has a limited operating history and is subject to risks, expenses and uncertainties frequently encountered by companies in the new and rapidly evolving markets for network capacity enhancement products and services. The Company has ceased its business activities since the middle of June 2003 and is seeking a purchaser for a controlling share in the Company and/or for the subsidiary Marnetics Ltd. and/or for Marnetics’s intellectual property. The inability to accomplish one or more of these goals would have a material adverse effect on the Company. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty and these adjustments may be material.

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

In May 2002, Marnetics submitted an application to obtain research and development grant in the sum of $230,000 from the Office of the Chief Scientist, of the Ministry of Industry and Trade, of the State of Israel (“OCS”) which application was subsequently approved in November 2002. To date Marnetics has received a grant of $220,000. The grant is based on research and development expenses that Marnetics had actually expensed until December 31, 2003. There can be no certainty that the remaining funding will be received by Marnetics.

As of April 26, 2003, the Company decided to lay off the majority of the employees of the Company and its wholly-owned subsidiary, Marnetics Ltd. in the areas of marketing, sales and research and development. The Company maintained the services of certain of its officers in order to implement its operational plan, which reflected the reduction of the company’s activities in the areas of research and development, and marketing and sales

At the annual shareholders meeting on March 12, 2004, the Company’s operational plan for the year 2004 was approved. It made provision for steps to begin liquidation of the Company. (See “Item 8B – Significant Changes.”) It is currently examining the possibility of terminating the registration of its ordinary shares under the Securities Exchange Act of 1934, hence ceasing its reporting obligations to the Securities Exchange Commission. The Company has been in on-going serious discussions throughout the second quarter of year 2004 with a with a third party acquirer interested in purchasing a controlling share in the Company. (See “Item 8B – Significant Changes.”) There can be no assurance that the potential investor will agree to purchase a controlling share in the Company or that the conditions to closing of such transaction (which will require shareholder approval) will be obtained.

Effective March 2001 the Company sold to Idan Millenium Investments and Assets Ltd. (“IDAN’), a company under the control of Dov Strikovsky, a major shareholder and former President, Chairman and CEO of the Company, all the fixed assets, inventories, other assets and liabilities and related goodwill, in the amount of an an appraised value of $2,000,000, relating to the electrical operations, for a consideration of $597,000. The consideration is payable in 25 monthly installments of $24,000 commencing February 1, 2002. In May 2002 the Company signed an addendum with IDAN to change the terms of payments to such that the first 11 installment will be reduced to $7,000 each and the remaining 14 installments will be of $37,000. The Company, considering the collectibility probability, decided to establish an allowance on the amount not yet collected. During year 2002 $71,000 was repaid on the account of the sale consideration. In year 2004 Mr. Strikovsky is involved in legal proceedings leading towards his filing for bankruptcy. If adjudged bankrupt, this will have a direct negative impact on the ability of the Company to collect the amounts due from him. (See “Item 7B – Related Party Transactions.”)

In prior years the Company granted loans to Mr. Strikovsky in the amount of $1,228,000. The loan was linked to the Israeli CPI and bore interest of 2% per annum and was repayable in eight annual installments each comprised of 1/8 of the principal and the accrued interest thereon commencing December 2000. At December 31, 2001 the Company reassessed the collectibility of the loan in accordance with provisions of SFAS No. 114 “Accounting by Creditors for Impairment of a Loan”, and resolved, considering the probability of its collectibility, to establish a loan loss allowance for the entire amount. Income from impaired loan will be recorded using the cash method. During year 2002 $142,000 was repaid on the account of the loan. In year 2004 Mr. Strikovsky is involved in legal proceedings leading towards his filing for bankruptcy. If adjudged bankrupt, this will have a direct negative impact on the ability of the Company to collect the amounts due from him.

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

The Company has informed the Bank that, following prolonged negotiations, the Municipality of Hod Hasharon stated its position to the effect that it is not obligated towards the Company and retains all rights in the matter, and that further more has, in its opinion, claims against the Company amounting to some NIS 4 Million (approximately $900,000). In light of the position taken by counsel to the municipality, the Company informed the Bank that bringing legal action is unavoidable, and that in the opinion of the Company remains the only course of action that may result in the recovery of the funds due to it.

In light of the current relationship between the Company and Mr. Strikovsky (See “Item 8A - Legal Proceedings”), the Company was of the opinion that the suit brought against the Municipality of Hod Hasharon should be based upon the letter by the head of the Municipality’s Engineering Department approving the assignment of the debt to the Bank and confirming the debt towards the Company. The Company believed that it would be proper that the Bank join the Company in bringing such suit and share in its expense. The Bank has yet to formally respond to the Company’s suggestion, although it has learned from counsel to the Bank that it is reluctant to join the suit, but may be willing to share some of the expenses involved. The Company is of the Opinion that the Bank’s position is detrimental to the Company’s efforts.

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

Until September 2000 the Company held 33.6% of the outstanding shares of Speedwise Technologies Ltd (“Speedwise”). In September 2000, Speedwise issued shares to a third party resulting in a decrease in the Company’s holdings to 19.19% and during February 2001 additional shares were issued to third parties resulting in a further dilution to 14.73%. In October 2002 Speedwise sold its assets and intellectual property to a third party in consideration of cash and shares. Since then Speedwise has ceased operations but still owns the shares of the third party. Based on the consideration received by Speedwise, the Company assessed the recoverable amount of its investment in Speedwise at $60,000 and recorded an impairment charge of $522,000. As at the end of the year 2003 the Company, accepting a conservative approach, decided to write-off the remaining $60,000 value of its investment in Speedwise when it became apparent that the near-term ability to recover the assessed value of their third party shares was dependent upon uncertainties and contingencies. Any future income resulting from these shares will be recorded in the year in which monies are actually received.

At the annual shareholders meeting on March 12, 2004, the Company’s operational plan for the year 2004 was approved. It made provision for steps to begin liquidation of the Company. (See “Item 8B – Significant Changes.”) It is currently examining the possibility of terminating the registration of its ordinary shares under the Securities Exchange Act of 1934, hence ceasing its reporting obligations to the Securities Exchange Commission. The Company has been in on-going serious discussions throughout the second quarter of year 2004 with a with a third party acquirer interested in purchasing a controlling share in the Company. (See “Item 8B – Significant Changes.”) There can be no assurance that the potential investor will agree to purchase a controlling share in the Company or that the conditions to closing of such transaction (which will require shareholder approval) will be obtained.

YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002 UPDATE

Operating Revenues

The Company had $4000 in sales for the year ended December 31, 2003 compared to $19,000 in sales for the year ended December 31, 2002.

Operating Expenses

Research and Development expenses consisted primarily of salaries and related expenses. Research and Development expenses decreased to $210,000 for the year ended December 31, 2003 from $486,000 for the year ended December 31, 2002. The decrease was primarily due to Company’s reduction of its research and development activities and the receipt of a grant from the OCS in the sum of $80,000.

Selling and Marketing expenses which consisted mostly of salaries decreased to $174,000 for the year ended December 31, 2003 from $464,000 for the year ended December 31, 2002, due to reduction of business development efforts. Travel and promotional expenses decreased as promotional activities were reduced.

General and Administrative expenses consisted primarily of salaries and related expenses for administrative and executive staff, fees for professional services, and general office and rent expenses. General and Administrative expenses decreased to $434,000 for the year ended December 31, 2003, from $784,000 for the year ended December 31, 2002. The decrease was primarily due to the reduction of employees and decreased professional and consulting fees.

Non-cash compensation expenses totaled $792,000 for the year ended December 31, 2003 and $792,000 the year ended December 31, 2002. Non-cash compensation includes the amortization of unearned employee stock-based compensation and expenses for options granted to a related party. Stock-based compensation expenses are amortized over the vesting schedule of the option, typically four years, using the straight-line approach.

Financial Income

Net financial income (expense) for the year ended December 31, 2003 and the year ended December 31, 2002 was $(101,000) and $32,000, respectively. These items consist of interest earned on bank deposits and gains and losses from a re-measurement of monetary balance sheet items resulting from transactions in non-dollar currencies.

Share in losses of Affiliate

Tax

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

Discontinued Operations

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

Net Loss

Net loss for the year ended December 31, 2003 and for the year ended December 31, 2002 was $1,767,000 and $3, 021,000, respectively. Net loss per share was $(0.24) and $(0.41) respectively.

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

Operating Revenues

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

Operating Expenses

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

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

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

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

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

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

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

Non-cash compensation expenses totaled $792,000 for the year ended December 31, 2002 compared to $805,000 for the year ended December 31, 2001. Non-cash compensation includes the amortization of unearned employee stock-based compensation and expenses for options granted to a related party. Stock-based compensation expenses are amortized over the vesting schedule of the option, typically four years, using the straight-line approach.

Financial Income

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

Share in losses of Affiliate

Tax

During the year 2002 the Company and Marnetics reached an agreement with the tax authorities regarding tax liability for the years 1998 to 2001. The Company made a provision for this liability and for the year 2002.

Discontinued Operations

Net Loss

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

B. Liquidity and Capital Resources

To date, the Company has funded its operations through equity investments and bank credit lines. During the year 2000 Marnetics issued shares in consideration of $7,297,000. On December 31, 2003, the Company had $234,000 of cash and cash equivalents compared to $957,000 on December 31, 2002. The decrease of $723,000 is primarily a result of cash being used to finance the operational activities of the Company as well as to pay for legal expenses. As of December 31, 2003, the Company had no bank credit lines and is financing its activities from available cash.

As from the second quarter of the year 2004, in accordance with the Company’s operational plan for the year 2004 (See Item 8B – Significant Changes), Company began selling off some of its office equipment and computers and has generated additional cash from these sales.

At the annual shareholders meeting on March 12, 2004, the Company’s operational plan for the year 2004 was approved. It made provision for steps to begin liquidation of the Company. (See “Item 8B – Significant Changes.”) It is currently examining the possibility of terminating the registration of its ordinary shares under the Securities Exchange Act of 1934, hence ceasing its reporting obligations to the Securities Exchange Commission. The Company has been in on-going serious discussions throughout the second quarter of year 2004 with a with a third party acquirer interested in purchasing a controlling share in the Company. (See “Item 8B – Significant Changes.”) There can be no assurance that the potential investor will agree to purchase a controlling share in the Company or that the conditions to closing of such transaction (which will require shareholder approval) will be obtained.

The Company’s capital requirements have been reduced in accordance with the diminished activities of the Company.

The cash balances and equivalents as of December 31, 2003 are sufficient to meet the budgeted operating expenses for year 2004, but would be insufficient to cover all of the liabilities, namely the provisions for the bank guarantee and legal claims as presented in the financial statements as of December 31, 2003 (See – Item 18 Financial Statements).

Net cash used in operating activities in 2003, 2002, and 2001 was $715,000, $1,391,000, and $4,120,000, respectively. Since the Company has not generated meaningful revenues to date, it used its working capital to fund its research and development, marketing, sales general and administrative expenses. At present the net cash is being used to fund administrative expenses.

The Company had as of December 31, 2003 a negative working capital of $859,000, compared to a positive working capital of $3,000 as of December 31, 2002.

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

Total shareholder equity (deficiency) on December 31, 2003 was $(767,000) and $208,000 on December 31, 2002.

C. Recently Issued Accounting Standards

In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities, an interpretation of ARB 51”. The primary objectives of this interpretation are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights (“variable interest entities”) and how to determine when and which business enterprise (the “primary beneficiary”) should consolidate the variable interest entity. This new model for consolidation applies to an entity in which either (i) the equity investors (if any) do not have a controlling financial interest; or (ii) the equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties. In addition, FIN 46 requires that the primary beneficiary, as well as all other enterprises with a significant variable interest in a variable interest entity, make additional disclosures. Certain disclosure requirements of FIN 46 were effective for financial statements issued after January 31, 2003. In December 2003, the FASB issued FIN 46 (revised December 2003), “Consolidation of Variable Interest Entities” (“FIN 46-R”) to address certain FIN 46 implementation issues. The effective dates and impact of FIN 46 and FIN 46-R are as follows: (i) Special-purpose entities (“SPEs”) created prior to February 1, 2003. The company must apply either the provisions of FIN 46 or early adopt the provisions of FIN 46-R at the end of the first interim or annual reporting period ending after December 15, 2003. (ii) Non-SPEs created prior to February 1, 2003. The company is required to adopt FIN 46-R at the end of the first interim or annual reporting period ending after March 15, 2004. (iii) All entities, regardless of whether an SPE, that were created subsequent to January 31, 2003. The provisions of FIN 46 were applicable for variable interests in entities obtained after January 31, 2003. The adoption of the provisions applicable to SPEs and all other variable interests obtained after January 31, 2003 did not have a material impact on the company’s consolidated financial position, consolidated results of operations, or liquidity.

In April 2003, the FASB issued SFAS No. 149, “Amendment of SFAS No. 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. In particular, this Statement clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative. It also clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003 and did not have a material impact on the Company’s financial statements.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes standards for how a company classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify certain financial instruments as a liability (or as an asset in some circumstances). SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have an impact on the Company’s financial statements.

D. Research and Development

Research and Development expenses decreased to $210,000 for the year ended December 31, 2003 from $486,000 for the year ended December 31, 2002. The decrease was primarily due to Marnetics reduction of its research and development activities and reducing staff. As of June 2003, the Vice President of R&D, Nr. Hanoch Newman, was no longer employed by Marnetics. Present research and development efforts have ceased.

In May 2002, Marnetics Ltd. submitted to the OCS a request to obtain research and development funding in the sum of $230,000 from the Office of the Chief Scientist, of the Ministry of Industry and Trade, of the State of Israel (“OCS”) for development of products for the Prospera™ platform which was approved on November 2002. The total amount of grants received during the years ended December 31, 2003 and December 31, 2002 were $80,000 and $140,000 respectively, or a total of $220,000.

Marnetics is committed to pay royalties to the Office of the Chief Scientist of the Government of Israel on proceeds from sales of products in which the Chief Scientist has participated by way of grants, up to the amount of 100% of the grants received, in dollar terms plus interest at LIBOR. The royalties are payable at a rate of 3% for the first three years of product sales and 3.5% thereafter. No royalty expenses were paid to the Chief Scientist in 2002 and 2003. The research and development grants are presented in the statements of operations as an offset to research and development costs. The refund of the grant is contingent on future sales and Marnetics has no obligation to refund these grants, if sufficient sales are not generated. Based on the terms established in the agreement with the OCS the Company may not sell its IP to a non-Israeli entity.

E. Trend Information

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

F. Off-Balance Sheet Arrangements

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

Item 6. Directors, Senior Managers and Employees

A. Directors and Senior Management

The following is a list of our directors and senior management, as of the end of March 31, 2004 followed by a description of their business background:

Name	Age	Position

Menachem Reinschmidt	44	Chairman of the Board*
Moshe Rubin	50	External Director
Dr. Ora Setter	51	External Director
George Balot	62	Director and Acting Chief Financial Officer*
David Sheetrit	41	Director and Acting Chief Executive Officer*

*Mr. Menachem Reinschmidt became Chairman of the Board of the Company on November 2002. Mr. David Sheetrit, who had been the Chief Operating Officer of the Company from January 2001, became the Acting Chief Executive Officer of the Company effective June 22, 2003. Mr. Ilan Hadar was the Chief Financial Officer of the Company up until July 26, 2003. As from June 15, 2003 Mr. George Balot shared the duties of CFO with Mr. Hadar until Mr. Hadar’s departure, at which time Mr. Balot was Acting Chief Financial Officer of the Company on a part-time basis.

Menachem Reinschmidt, Chairman of the Board of the Company since November 2002 and Director of the Company since 2001; Mr. Reinschmidt has been Director of Marnetics Ltd., and Director of Marnetics, Inc, since the establishment of both entities. Mr. Reinschmidt established Marnetics in 1998 and was the first Chief Executive Officer of Marnetics. Being one of the leading data communication experts in Israel, Mr. Reinschmidt has 19 years of experience in the most advanced fields of computer networks, including design, analysis, integration and development. His expertise incorporates advanced networking topics, including frame relay, TCP/IP, Internet architecture, ATM, Local Area Networks, routers and switches, voice-over IP, etc. Prior to founding Marnetics, from 1993 to 1997 Mr. Reinschmidt was President of ATLan, a software development company located in Tel Aviv. He is a lecturer and the author of the Hebrew bestseller Local Area Networks for PC and Compatibles.

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

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

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

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

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

On March 4, 2003, the last director designated by Prime Technology Ventures, Mr. Pekka Roine, resigned.

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

Term and Rights to Designate Board Members

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

With the exception of the two External Directors (who are paid in accordance with the provisions of the Companies Law, as defined below) and of Mr. Menachem Reinschmidt for his services as Active Chairman (under the Services Agreement with Netlogic Ltd., a company wholly owned by Mr. Reinschmidt), the Company’s directors do not currently receive any compensation for their services as directors. The Company paid Mr. George Balot an attendance fee of $200 for his participation in meetings of the Board of Directors which were held prior to and up until his becoming Acting Chief Financial Officer of the Company.

Certain shareholders of the Company have the right to nominate designees for the Company’s Board of Directors. The former Marnetics Ltd. shareholders, who were issued shares of the Company pursuant to a merger agreement between the Company and Marnetics Ltd. consummated on December 20, 2000, agreed that they will vote in favor of certain nominees for Director of the Company as follows: (i) one nominee designated by ECI Telecom Ltd. (“ECI”) in the event that ECI holds 12.5% of the issued and outstanding share capital of the Company, or two nominees in the event that ECI holds 25% of the issued and outstanding share capital of the Company, (ii) one nominee designated by STI Ventures Investments No. 2 B.V. (“STI”), as long as STI holds not less than 5% of the outstanding share capital of the Company, as well as STI can appoint one member as an observer to the Board of Directors of the Company, (iii) one nominee designated collectively by Prime Technology Ventures NV, Docor International BV and Ronchal Investments NV, as long as the Docor Group holds no less than 5% of the outstanding share capital of the Company, and (iv) one nominee designated by Linkware Ltd. (a company under the control of Mr. Reinschmidt) as based on an agreement between the shareholders. To date, STI and ECI have not designated a nominee for the Company’s board and the last director designated by Prime Technology Ventures, Mr. Pekka Roine, resigned on March 4, 2003.

Alternate Directors

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

External Directors

Under the Israel Companies Law (the “Companies Law”), public companies are required to elect two external directors who must meet specified standards of independence. Companies that are registered under the laws of Israel and whose shares are listed for trading on a stock exchange outside of Israel, such as the Company, are defined as public companies and under such definition are subject to the requirement of electing two external directors. An external director may not have had during the previous two years any economic relationship with the Company. Controlling shareholders of a company, 50% shareholders, and their relatives or employees cannot serve as external directors. External directors are elected by shareholders. No individual shall be appointed as an external director if his other positions or affairs create or are liable to create a conflict of interest with his position as director, or if they are liable to constrain his ability to serve as director. The shareholders voting in favor of their election must include at least one-third of the shares of the non-controlling shareholders of the Company who are present at the meeting. This minority approval requirement need not be met if the total shareholdings of the non-controlling shareholders who vote against their election represent 1% or less of all of the voting rights in the Company. Under the Companies Law, external directors serve for a three-year term, which may be renewed for only one additional three-year term, accordingly, Dr. Ora Setter will serve for a three-year term, or until November 2005.

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

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

The Company’s Amended and Restated Articles of Association provides that the Board of Directors shall consist of a minimum of two (2) and a maximum of eleven (11) directors. Each director, except for External Directors, shall serve as a director from the time of appointment until the next Annual General Meeting.

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

Liability, Indemnification and Exemption of Officers and Directors

According to the Companies Law and the Amended and Restated Articles of Association of the Company, the Company may indemnify an office holder against:

	•	a financial liability imposed on him in favor of another person by any judgment, including a settlement or an arbitrator’s award approved by a court in respect of an act performed in his capacity as an office holder; and

	•	reasonable litigation expenses, including attorneys’ fees expended by such office holder or charged to him by a court, in proceedings the Company institutes against him or instituted on the Company’s behalf or by another person, or in a criminal charge from which he was acquitted, or a criminal charge for which he was convicted, providing such charge does not require proof of criminal intent.

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

	•	a breach by the office holder of his duty of loyalty, unless the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company;

	•	a breach by the office holder of his duty of care, if such breach was done intentionally or in disregard of the circumstances of the breach or of the consequences;

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

	•	any fine levied against the office holder.

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

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

	•	breach of fiduciary duty owed to the Company by any office holder, to the extent that such office holder acted in good faith and had a reasonable basis to assume that the action would not prejudice the Company; and

	•	any financial liability imposed on any office holder for the benefit of a third party as a result of any act or omission such office holder committed as an office holder of the Company.

As a result of previous shareholders’ resolutions dated March 12, 2004, the Company entered into an indemnification agreement with the officers and directors of the Company and intends to continue entering into an agreement with each new officer and director, subject to shareholder approval. Such agreements contain provisions which endeavor to limit the personal liability of the officers and directors, both to the Company and to its shareholders, for monetary damages resulting from breaches of certain fiduciary duties as directors and officers of the Company. In particular, such agreements provide that the Company will indemnify such individuals to the fullest extent permitted by the Companies Law, as such rights shall from time to time be amended or limited, against all expense, liability, and loss reasonably incurred or suffered by the indemnified as a result of serving as an officer or director or employee of the Company, or any affiliate thereof or any other entity at the request of the Company.

Under the Company’s Amended and Restated Articles of Association, the Company may also indemnify its officers and directors for financial obligations imposed on them in favor of a third party by a court judgment, including a compromise judgment or a court-approved arbitrator’s decision, as well as for concomitant reasonable legal expenses, including attorney’s fees, as a result of any claim arising from a wrongful act in the discharge of their duties in their capacity as officers or directors of the Company which could materially adversely affect the business, prospects, financial condition, or results of operations of the Company. (See – Item 8B Significant Changes) regarding providing legal services under a legal services agreement in lieu of obtaining D&O insurance).

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

Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the “Securities Act”) may be permitted to officers, directors, and controlling persons of the Company pursuant to the foregoing provisions or otherwise, the Company has been advised that, in the opinion of the United States Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable in the United States.

B. Compensation

The Company’s directors do not currently receive any compensation for their services as directors. In addition, under the Companies Law, external directors are entitled to annual compensation plus per meeting attendance fee. The Company currently pays its external directors an annual fee of US $3,100 and per meeting attendance fee of US $200. Every two telephone conference calls are considered one meeting. Mr. George Balot received a per meeting attendance fee of US $200 until his becoming Active Chief Financial Officer on June 15, 2003. In addition, upon Mr. Balot’s assuming the function of Acting Chief Financial Officer of the Company, he received compensation of $2,000 per month for 70 hours per month of work for the Company from June 15, 2003 until December 31, 2003, and $2,500 per month from January 1, 2004 until March 31, 2004. At a board meeting on June 30, 2004 it was agreed to compensate both for their time and services rendered and expenses, to Mr. Reinschmidt, Mr. Sheetrit and Mr. Balot for their services to the Company for the second quarter of year 2004.

It was further discussed at the board meeting on June 30, 2004, the continuation of the compensation and expenses for their services after June 30, 2004 regarding providing services in the negotiations with the potential purchaser in managing the due diligence process, the closing of the transaction, the proxy process and the annual shareholders meeting, as well as any initial steps for liquidation if the negotiations with the potential purchaser do not materialize. (See “Item 8B – Significant Changes.”) The Company will discuss such at the next board meeting and come back to these officers with written proposals for such services.

In addition, Mr. Balot had an agreement with the Company to receive a finder’s fee based only on success in selling the Company’s technology and/or finding an appropriate merger partner for the Company. This agreement expired during year 2003.

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

The Board of Director after receiving the approval of the Audit Committee approved an Addendum to the Netlogic Ltd. Services Agreement (effective December 2, 2002) for six (6) months, from December 2, 2002 to June 2, 2003. The position of Mr. Reinschmidt during the period with the Company was that of Active Chairman of the Board of Directors. The duties of the Active Chairman, amongst others, includes locating potential companies to enter into partnerships, finding potential mergers and acquisitions, finding investors interested in the Company, selling the Company’s technology and its intellectual property. Mr. Reinschmidt spent 50% of his time with respect to these duties and the compensation for such duties being a monthly gross fee of $5,000 (five thousand dollars) plus Value Added Tax. In addition, the Company provides Mr. Reinschmidt with a leased car and cellular phone for the duration of the extension of the Netlogic Ltd. Services Agreement.

A Second Addendum to this Services Agreement effective December 2, 2002, was signed on June 2, 2003 and approved by the shareholders for the additional period through December 31, 2003.

The Company with shareholder approval extended the Netlogic Ltd. Services Agreement for an additional period up to March 31, 2004 for the continued rendition of services at two days per week with a monthly compensation of $2,000 with a leased car and a cellular phone. At a board meeting on June 30, 2004 it was agreed to compensate both for their time and services rendered and expenses, to Mr. Reinschmidt, Mr. Sheetrit and Mr. Balot for their services to the Company for the second quarter of year 2004.

In addition, Mr. Reinschmidt is receiving contingent compensation for continued support of the Company’s Legal Proceedings. (See Item 7B Related Party Transactions - Compensation for Continued Support of Company’s Legal Proceedings.”)

Mr. David Sheetrit, Acting Chief Executive Officer of the Company since June 2003, the Chief Operating Officer of the Company between January 2001 and June 2003, and Director of the Company since April 2003, provides services under a Services Agreement and received monthly compensation through December 31, 2003 of $4,000, a leased car and a cellular phone, the same as when he was the Chief Operating Officer of the Company. For the additional period through March 31, 2004 his monthly compensation, based upon two days a week, was reduced to $2,000. At a board meeting on June 30, 2004 it was agreed to compensate both for their time and services rendered and expenses, to Mr. Reinschmidt, Mr. Sheetrit and Mr. Balot for their services to the Company for the second quarter of year 2004.

In addition, Mr. Sheetrit is receiving contingent compensation for the continued support of the Company’s Legal Proceedings. See “Item 7.B. Related Party Transactions –Compensation for Continued Support of Company’s Legal Proceedings”

Mr. Ilan Hadar, former CFO, left the Company effective the end of July 2003.

Mr. Hanoch Newman, VP Research and Development, provided services to the Company during 2003 at a reduced salary according to 80% of his time. In addition to his salary, he was entitled to receive from sales commission of 8 percent of all sales accomplished through his efforts. Mr. Newman left the Company in June 2003.

C. Board Practices

See “Item 6A – Director and Senior Management” for period that our directors and senior management are serving.

Committees of the Board of Directors – Audit Committee

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

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

The Company has an audit committee that consists of Ora Setter and Moshe Rubin. George Balot served on the audit committee until his assuming the function of Acting Chief Financial Officer in June 2003. The audit committee examines, for the Board of Directors, the Company’s accounting, reporting and financial control practices.

Advisory Committee

During year 2002, to further the Company’s progress in both marketing and technology, an Advisory Committee was formed to represent both the technology and the investments made in the Company. It was comprised of the following individuals: Erez Aluf, representing STI Ventures Investments No. 2 B.V., Moshe Kessner, Joshua Piasetzky representing ECI Telecom Ltd, and Michael Schlesinger representing Docor International BV. The Committee, advisory to management in nature, did not have the power of board of director members and has been inactive since August 2002.

D. Employees

On December 11, 2002 the Board of Directors resolved to authorize management of Marnetics to structure an Employment Stock Option Plan for the year 2003 and to allocate to employees of Marnetics up to 5 (five) per cent of the issued and outstanding share capital of Marnetics on a fully diluted basis. During year 2003 there was no allocation.

As of April 26, 2003 when the Company and its wholly-owned subsidiary, Marnetics Ltd, decided to lay off the majority of its marketing, sales, research and development employees, the Company had employed approximately 13 persons, of whom six (6) worked in research and development, two (2) in marketing and sales, and five (5) in general and administrative.

The Company maintained the services of certain of its officers in order to implement its operational plan, which reflected the reduction of the company’s activities in the areas of research and development, and marketing and sales. Mr. Reinschmidt, Mr. Sheetrit and Mr. Balot have been serving the Company under services agreements.

A Second Addendum to this Services Agreement effective December 2, 2002, was signed on June 2, 2003 and approved by the shareholders for an additional period through December 31, 2003.

At a board meeting on June 30, 2004 it was agreed to compensate both for their time and services rendered and expenses, to Mr. Reinschmidt, Mr. Sheetrit and Mr. Balot for their services to the Company for the second quarter of year 2004.

It was further discussed at the board meeting on June 30, 2004, the continuation of the compensation and expenses for their services after June 30, 2004 regarding providing services in the negotiations with the potential purchaser in managing the due diligence process, the closing of the transaction, the proxy process and the annual shareholders meeting, as well as any initial steps for liquidation if the negotiations with the potential purchaser do not materialize. (See “Item 8B – Significant Changes.”) The Company will discuss such at the next board meeting and come back to these officers with written proposals for such services.

In addition, Mr. Reinschmidt is receiving contingent compensation for continued support of the Company’s Legal Proceedings. (See Item 7B Related Party Transactions - Compensation for Continued Support of Company’s Legal Proceedings.”)

Mr. David Sheetrit, Chief Executive Office of the Company since June 2003, the Chief Operating Officer of the Company between January 2001 and June 2003, and Director of the Company since April 2003, provides services under a Services Agreement and received monthly compensation through December 31, 2003 of $4,000, a leased car and a cellular phone, the same as when he was the Chief Operating Officer of the Company. For the additional period through March 31, 2004 his monthly compensation, based upon two days a week, was reduced to $2,000. At a board meeting on June 30, 2004 it was agreed to compensate both for their time and services rendered and expenses, to Mr. Reinschmidt, Mr. Sheetrit and Mr. Balot for their services to the Company for the second quarter of year 2004. It was further discussed at the board meeting on June 30, 2004, the continuation of the compensation and expenses for their services after June 30, 2004 regarding providing services in the negotiations with the potential purchaser in managing the due diligence process, the closing of the transaction, the proxy process and the annual shareholders meeting, as well as any initial steps for liquidation if the negotiations with the potential purchaser do not materialize. (See “Item 8B – Significant Changes.”) The Company will discuss such at the next board meeting and come back to these officers with written proposals for such services.

In addition, Mr. Sheetrit is receiving contingent compensation for the continued support of the Company’s Legal Proceedings. (See “Item 7B Related Party Transactions –Compensation for Continued Support of Company’s Legal Proceedings.”)

Mr. Ilan Hadar, former CFO, left the Company effective the end of July 2003.

Based on a signed agreement June 22, 2003, effective June 15, 2003 and in effect until December 31, 2003, Mr. George Balot was the Acting Chief Financial Officer of the Company on a part-time basis of $2,000 a month for 70 hours of work, with an additional $45 per hour for every approved hour over that time, and $2,500 a month for the period January 1, 2004 through March 31, 2004. At a board meeting on June 30, 2004 it was agreed to compensate both for their time and services rendered and expenses, to Mr. Reinschmidt, Mr. Sheetrit and Mr. Balot for their services to the Company for the second quarter of year 2004. It was further discussed at the board meeting on June 30, 2004, the continuation of the compensation and expenses for their services after June 30, 2004 regarding providing services in the negotiations with the potential purchaser in managing the due diligence process, the closing of the transaction, the proxy process and the annual shareholders meeting, as well as any initial steps for liquidation if the negotiations with the potential purchaser do not materialize. (See “Item 8B – Significant Changes.”) The Company will discuss such at the next board meeting and come back to these officers with written proposals for such services.

Mr. Hanoch Newman, VP Research and Development, provided services to the Company during 2003 at a reduced salary. In addition to his salary, he was entitled to receive sales commission of 8 percent of all sales accomplished through his efforts. Mr. Newman left the Company in June 2003.

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

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

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

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

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

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

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

E. Share Ownership

See Item 7: “Major Shareholders and Related Party Transactions.”

Stock Option Plan

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

The Company’s board of directors adopted a written stock option plan in its meeting of June 17, 2001. As of December 31, 2003, 187,221 options are allocated to employees. In addition, former employees of Stav, have been allocated 157,143 options, which are fully vested.

Item 7. Major Shareholders and Related Party Transactions

A. Major Shareholders

The following table identifies, as of February 2, 2004, certain information with respect to the beneficial ownership of securities of the Company of each person or entity by the Company to be the beneficial owner of five percent (5%) or more of the Ordinary Shares of the Company:

Name and Address of Beneficial Owner	Number		Percent⁽¹⁾

Linkware Ltd. 3 Hadror Street P.O. Box 73 Hod Hasharon 45100 Israel	1,740,575	⁽²⁾	18.77	%

Dov Strikovsky 83 Akiva Street Ra’anana, Israel	985,714	⁽³⁾	10.63	%

ECI Telecommunications Ltd. 34 Hasivim Street Kiryat Aryeh Industrial Park Petach Tikva Israel	1,187,439		12.81	%

STI Ventures Investments No. 2 B.V Hullenbergweg 379 1101 Cr. Amsterdam Zuide – Oost The Netherlands	1,180,907		12.74	%

Prime Technology Ventures NV Stroombaan 6-8 1181 VX Amstelveen, The Netherlands	630,550		6.80	%

	(1)	The number of shares beneficially owned is determined under rules promulgated by the Securities and Exchange Commission, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under these rules, beneficial ownership includes any shares as to which the individual has sole or shared voting power or investment power and also any shares that the individual has the right to acquire within 60 days after February 2, 2004, through the exercise of any stock option or other right. The inclusion herein of such shares, however, does not constitute an admission that the named shareholder is a direct or indirect beneficial owner of such shares. Unless otherwise indicated, each person or entity named in the table has sole voting power and investment power, or shares such power with his or her spouse, with respect to all shares of capital stock listed as owned by such person or entity. The calculation hereunder does not take into account (i) an unallocated pool of 648,759 options and (ii) 17,125 un-vested options granted to employees.

		Based on 7,362,390 Ordinary Shares outstanding as of February 2, 2004 and 1,964,113 options, which are presently or will become exercisable within 60 days.

	(2)	Includes 302,266 shares that may be acquired by Linkware Ltd. pursuant to options that are presently or will become exercisable within 60 days at an exercise price of par value per share. Mr. Menachem, Reinschmidt, major shareholder and Active Chairman of the Board of Directors of the Company, is a controlling shareholder of Linkware Ltd.

	(3)	Includes 550,000 shares that may be acquired pursuant to options with an exercise price of $3.00 per share, which are presently or will become exercisable within 60 days by O.S.I. Limited, which is controlled by a trust, the beneficiaries of which are family members of Dov Strikovsky.

As of February 2, 2004, 1,008,809 Ordinary Shares of the Company were held of record in the United States. Such Ordinary Shares were held by five (5) record holders and represented 13.7% of the total Ordinary Shares then outstanding (10.1% on fully diluted basis). On February 2, 2004, 6,353,581 of the Ordinary Shares were held of record outside of the United States. Such shares were held by seventeen (17) Record holders and represented 86.3% (89.9% on a fully diluted basis) of the total Ordinary Shares outstanding. Since brokers or other nominees held 927,546 of these Ordinary Shares, the number of record holders in the United States may not be representative of the number of beneficial holders or where the beneficial holders are resident.

The following table sets forth certain information as of February 2, 2004, with respect to the beneficial ownership of shares of Ordinary Shares by each of the Company’s directors and executive officers, individually, and the directors and executive officers of the Company as a group, assuming conversion of all convertible debt or preferred stock and exercise of all warrants and stock options by such person and only by such person

	Amount and Nature of Beneficial Ownership⁽¹⁾

Name of Beneficial Owner	Number of Shares		Percent of Class⁽²⁾


Menachem Reinschmidt, Director and CEO	1,740,575	⁽³⁾	18.7	%

Moshe Rubin, External Director	--		--

David Sheetrit, Director and CEO*	34,375	⁽⁴⁾	*

All Officers and Directors as a Group

(2 individuals)	1,774,950		19.03	%


*Less than 1%

	(1)	The number of shares beneficially owned is determined under rules promulgated by the Securities and Exchange Commission, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under these rules, beneficial ownership includes any shares as to which the individual has sole or shared voting power or investment power and also any shares that the individual has the right to acquire within 60 days after February 2, 2004, through the exercise of any stock option or other right. The inclusion herein of such shares, however, does not constitute an admission that the named shareholder is a direct or indirect beneficial owner of such shares. Unless otherwise indicated, each person or entity named in the table has sole voting power and investment power, or shares such power with his or her spouse, with respect to all shares of capital stock listed as owned by such person or entity. The calculation hereunder does not take into account (i) an unallocated pool of 648,759 options and (ii) 17,125 un-vested options granted to employees.

	(2)	Based on in 7,362,390 Ordinary Shares outstanding as of February 2, 2004 and 1,964,113 options, which are presently or will become exercisable within 60 days.

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

	(4)	Includes 34,375 shares that may be acquired pursuant to options, which are presently or will become exercisable within 60 days. Mr. Sheetrit has an option to acquire 2% of Linkware Ltd.,out of which 1% are presently or will become exercisable within 60 days after February 2, 2004.

	B.	Related Party Transactions

Sale of Electrical Business

Effective March 2001 the Company sold to Idan Millenium Investments and Assets Ltd. (“IDAN’), a company under the control of Dov Strikovsky, a major shareholder and former President, Chairman and CEO of the Company, all the fixed assets, inventories, other assets and liabilities and related goodwill, in the amount of an appraised value of $2,000,000, relating to the electrical operations for a consideration of $597,000. The consideration is payable in 25 monthly installments of $24,000 commencing February 1, 2002. In May 2002 the Company signed an addendum with IDAN to change the terms of payments to such that the first 11 installment will be reduced to $7,000 each and the remaining 14 installments will be of $37,000. The Company, considering the collectibility probability, decided to establish an allowance on the amount not yet collected. During years 2002 $71,000 was repaid on the account of the sale consideration. In year 2004 Mr. Strikovsky is involved in legal proceedings leading towards his filing for bankruptcy. If adjudged bankrupt, this will have a direct negative impact on the ability of the Company to collect the amounts due from him. See “Item 8B – Significant Changes.”

Speedwise Technologies Ltd.

In April 2001, Marnetics Ltd. entered into a software license agreement with Speedwise Technologies Ltd., a company in which Marnetics Ltd. currently owns 14.7% interest, that has ceased business operations. See “Item 4B – Licensing Arrangements.”

In July 2001, Marnetics Ltd. entered into an OEM agreement with Speedwise Technologies Ltd. Income of $9,000 was earned from Speedwise during year 2002. See “Item 4B – Customers and Distributors.” The OEM agreement was since cancelled.

Until September 2000 the Company held 33.6% of the outstanding shares of Speedwise Technologies Ltd (“Speedwise”). In September 2000, Speedwise issued shares to a third party resulting in a decrease in the Company’s holdings to 19.19% and during February 2001 additional shares were issued to third parties resulting in a further dilution to 14.73%. In October 2002 Speedwise sold its assets and intellectual property to a third party in consideration of cash and shares. Since then Speedwise has ceased operations but still owns the shares of the third party. Based on the consideration received by Speedwise, the Company assessed the recoverable amount of its investment in Speedwise at $60,000 and recorded an impairment charge of $522,000. For the year ended December 31, 2003 the Company, accepting a conservative approach, decided to write-off the remaining $60,000 value of its investment in Speedwise when it became apparent that the near-term ability to recover the assessed value of their third party shares was dependent upon uncertainties and contingencies. Any future income resulting from these shares will be recorded in the year in which monies are actually received.

Netlogic Ltd.

A Second Addendum to this Services Agreement effective December 2, 2002, was signed on June 2, 2003 and approved by the shareholders for an additional period through December 31, 2003.

It was further discussed at the board meeting on June 30, 2004, the continuation of the compensation and expenses for their services after June 30, 2004 regarding providing services in the negotiations with the potential purchaser in managing the due diligence process, the closing of the transaction, the proxy process and the annual shareholders meeting, as well as any initial steps for liquidation if the negotiations with the potential purchaser do not materialize. (See “Item 8B – Significant Changes.”) The Company will discuss such at the next board meeting and come back to these officers with written proposals for such services.

Compensation for Continued Support of Company’s Legal Proceedings

In light of the Company’s need for the continued support and involvement of its officers and directors in the legal proceedings which the Company and its subsidiary, Marnetics Ltd., have initiated against the Municipality of Hod Hashron, as well as against Dov Strikovsky and others (see “Legal Proceedings” below), the Company decided, with shareholder approval, considering it’s limited financial resources, to secure the continued involvement and support of Messrs. Menachem Reinschmidt, Chairman of the Board and David Sheetrit, director and acting Chief Executive Officer of the Company following March 31, 2004 by payment to each of Messrs. Reinschmidt and Sheetrit of 9% of any amounts awarded to the Company and/or its subsidiary, Marnetics Ltd., regarding these legal proceedings against the Municipality of Hod Hasharon.

The Company considers Messrs. Reinschmidt and Sheetrit’s continued support and involvement in the above legal proceedings, in light of the extent of their previous involvement, to be a pivotal factor in the Company’s ability to prevail in such proceedings, and therefore to be in the best interests of the Company and its shareholders. The Company believes that the contingent form of payment for such services, concluded in negotiations with Messrs. Reinschmidt and Sheetrit, is appropriate in light of the Company’s limited financial capabilities and prospects.

Inter Company Loan Agreement

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

Combination Transaction

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

Assignment of Bank Debt

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

In addition, the Company provided the Bank with a guarantee of up to $716,000, which decreases in the ratio of NIS 1:2 paid on account of the outstanding debt of Hod Hasharon which has been assigned to the Bank. To date, Hod Hashron has not made any re-payment on account of the debt, and therefore the guarantee has not decreased to date. According to the terms of the agreement with the Bank, following November 30, 2002, the Bank is entitled to exercise the outstanding amount of the guarantee. As the guarantee has not decreased, the Company decided to record an allowance in the financial records for the entire amount of the guarantee.

The Company has informed the Bank that, following prolonged negotiations, the Municipality of Hod Hasharon stated its position that it is not obligated towards the Company and that it retains all rights in the matter, and that further has claims against the Company amounting to some NIS 4 Million (approximately $900,000). In light of the position taken by counsel to the Municipality, the Company informed the Bank that bringing legal action is unavoidable, and that in the opinion of the Company remains the only course of action that may result in the recovery of the funds due to it.

In light of the current relationship between the Company and Mr. Strikovsky, the Company was of the opinion that the suit brought against the Municipality of Hod Hasharon should be based upon the letter by the head of the Municipality’s Engineering Department approving the assignment of the debt to the Bank and confirming the debt towards the Company.

Therefore, the Company was of the opinion that it would be proper that the Bank join the Company in bringing such suit and share in its expense. The Bank has yet to formally respond to the Company’s suggestion, although it has learned from counsel to the Bank that it is reluctant to join the suit, but may be willing to share some of the expenses involved. The Company is of the opinion that the Bank’s position is detrimental to the Company’s efforts.

On November 20 2003, the Company’s subsidiary, Marnetics Ltd., filed suit against the Municipality of Hod Hasharon and its then head of the Engineering Department, in the sum of NIS 10,000,000 (approximately $2.2 million). On March 2004, the Municipality of Hod Hasharon filed a counterclaim for NIS 4.48 million for payment in excess of work and services provided. (See “Item 8A - Legal Proceedings.”)

Indemnification by Significant Shareholder

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

2. In connection with the Stav/Marnetics transaction and pursuant to an amendment to the share exchange agreement, Mr. Strikovsky granted an indemnification to the former shareholders of Marnetics Ltd. against certain losses or damages related to the Electrical Business and had deposited 300,000 shares of the Company held by him in escrow as security for his indemnification obligations.

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

	•	Reimburse the Company for US $954,000 which is the amount the Company has paid to the bank pursuant to the debt assignment described above, to be paid in monthly installments of US $48,000 commencing June 1, 2004 until paid in full. All amounts due and payable to the Company are linked to the Israeli CPI and bear interest of 4% per annum. The reimbursement amount of $954,000 was not yet recognized as the probability of its realization is in doubt; and

	•	To indemnify the Company for any amount it may pay to Bank Hapoalim in the future under the guarantee granted by the Company in favor of the bank under the debt assignment or for any losses the Company may incur in connection with such debt assignment documents.

4. The Company and Mr. Strikovsky were named as a defendant in a claim for specific performance of an agreement allegedly entered into by the Company and the plaintiff, Ananda Capital Partners, Inc., in April 1999 (the “Agreement”) as well as damages as a result of a breach of the agreement. On July 2, 2001, due to the fact that no defense and/or reply were provided by the Company or Mr. Strikovsky, judgment was entered against the Company and Mr. Strikovsky in the amount of $725,000. On December 5, 2001, Mr. Strikovsky gave an undertaking to indemnify the Company for all legal expenses and court costs arising out or in connection with this claim. On February 7, 2002 the Company filed a motion to vacate the judgment and on February 27, 2002 the court rejected the motion. The Company filed an appeal on the court decision which was accepted by the Supreme Court of the State New York with instructions to allow evidentiary hearing. The hearing was held on May 22, 2003 and the Company is awaiting the court’s decision. The plaintiff proposed to settle the suit for $250,000 and while the Company was willing to further negotiate a substantially lower amount, in light of the plaintiff’s position the Company decided to reject the proposal. In 2001 the Company has established an allowance in the amount of $750,000 to provide for its possible exposure. In light of those developments the Company decreased the allowance by $500,000 to $250,000 which, in light of the judgment against the Company and the settlement offer proposed, represents a conservative estimate of the probable exposure. (See “Item 8A (1) – Financial Information -Legal Proceedings.”)

Loans to Significant Shareholder and Former Director and CEO

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

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

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

Mr. Strikovsky did not make further payments towards this loan. The balance due of the loan is $138,000. The Company notified Mr. Strikovsky of its default and is involved in ongoing legal efforts aimed at collecting amounts due from Mr. Strikovsky and the companies under his control. In year 2004 Mr. Strikovsky is involved in legal proceedings that can lead to his filing for bankruptcy which will have a direct negative impact on the ability of the Company to collect the amounts due from him.

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

C. Interests of Experts and Counsel

Not Applicable

Item 8. Financial Information

A. Financial Information

See “Item 18-Financial Statements”.

Legal Proceedings

1. The Company and Mr. Strikovsky were named as defendants in a claim for damages and specific performance of an agreement allegedly entered into by the Company and the plaintiff, Ananda Capital Partners, Inc., in April 1999 (the “Agreement”). On July 2, 2001, due to the fact that no defense and/or reply were provided by the Company or Strikovsky, judgment was entered against the Company and Strikovsky in the amount of $725,000. On February 7, 2002, both the Company and Strikovsky filed a motion to vacate the judgment, and on February 27, 2002, the court rejected the motion. The Company filed an appeal that was accepted by the Supreme Court of the State New York with instructions to allow an evidentiary hearing in regard to the defendants claim that the default judgment was entered without proper service of process. The hearing was held on May 22, 2003, but the court has not yet entered its decision. The plaintiff proposed to settle the suit for $250,000, and while the Company was willing to further negotiate a substantially lower amount, in light of the plaintiff’s position, the Company decided to reject the proposal. In 2001 the Company established an allowance in the amount of $750,000 to provide for its possible exposure. In light of subsequent developments, the Company decreased the allowance by $500,000 to $250,000, which, in light of the judgment against the Company and the settlement offer proposed, represents a conservative estimate of the probable exposure.

The Company filed the appropriate papers to bring an appeal to the rejection of the motion to vacate the judgment, in July 2002.

2. On September 10 2003, the Company filed suit against Mr. Strikovsky and others in the sum of NIS 3,193,743 (approximately $700,000) due to default under loans extended to Mr. Strikovsky by the Company, as well as other debts related to the sale of its electrical business to companyies under Mr. Strikovsky’s control. On December 4, 2003, the Company was able to obtain a court order for the seizure of certain notes credited to the defendants by the Municipality of Hod Hasharon.

3. On May 9, 2001 an agreement was signed between the Company and Bank Hapoalim, Ltd. with respect to the Company’s debt to the Bank in the amount of $3,127,000. (See “Item7B - Related Party Transactions - Assignment of Bank Debt.”)

After the consummation of the Bank Agreement, the Company was informed that the municipality of Hod Hasharon is delaying the payments due to the Bank. As a consequence the Company is carrying out negotiations with the municipality of Hod Hasharon for the repayment of the debt including interest accrued thereon. The legal advisor of the Company in a letter dated June 6, 2002 wrote that the present negotiations by the lawyers of the Company with the lawyers representing the municipality of Hod Hasharon can be considered to be legal procedures and that the guarantee can be considered extended under the Bank agreement until November 30, 2002. Since then the Bank has extended its agreement to withhold proceedings, which has lapsed in May 2003.

On November 20 2003, the Company’s subsidiary, Marnetics Ltd., filed suit against the Municipality of Hod Hasharon and its then head of the Engineering Department, in the sum of NIS 10,000,000 (approximately $2.2 million) (for court fee purposes), claiming that the negligence of and/or misrepresentations made by the Municipality at the time of the reverse merger transaction between the Company and Marnetics Ltd., in regard to the Municipality’s debt towards the Company, caused Marnetics Ltd. damages of some NIS 24,000,000 (approximately $5.33 million) between the years 2000 and 2002. On March 2004, the Municipality of Hod Hasharon filed a counterclaim for NIS 4.48 million for payment in excess of work and services provided.

4. On December 4, 2001, Mr. Menachem Reinschmidt, the Active Chairman of the Board of Directors of the Company, received two letters from Advocate Yori Nehushtan on behalf of two shareholders of the Company, Messrs. Yossi Tessler and Lavi Krasni. The letters raised the allegation that the Company’s Proxy Statement filed on November 17, 2000, contained false representations regarding the Company’s technology. Mr. Reinschmidt and the Company contend that no false representations were given, that such representations were given subject to various risk factors clearly detailed in the Company’s Proxy Statement, and that in any event, such representations are protected under the “safe harbor” provisions of the Securities and Exchange Act of 1934 as forward looking statements under United States securities laws. On September 14, 2001, the shareholders of Marnetics Ltd. approved a resolution to indemnify Mr. Reinschmidt in respect to the demand letter sent by Advocate Yori Nehustan on behalf of Yossi Tessler and Lavie Krasni, in accordance with the provisions and limitations set out in the Israeli Companies Law.

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

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

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

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

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

7. The Company had an outstanding debt of approximately $28,000 to the law firm of Ohernstein & Brown for legal services rendered to the Company in connection with its defense of the Ananda Capital Partners Inc. lawsuit. The debt was settled in full by payment of $14,000 in June 2004. Ohernstein & Brown has signed a release of claim against the company, but no longer represents the Company in regard to the Ananada Capital Partners Inc. law suit.

Dividend Policy

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

B. Significant Changes

At the annual shareholders meeting on March 12, 2004, the Company’s operational plan for the year 2004 was approved. It made provision for steps to begin liquidation of the Company. (See “Item 8B – Significant Changes.”) It is currently examining the possibility of terminating the registration of its ordinary shares under the Securities Exchange Act of 1934, hence ceasing its reporting obligations to the Securities Exchange Commission. The Company has been in on-going serious discussions throughout the second quarter of year 2004 with a with a third party acquirer interested in purchasing a controlling share in the Company. (See “Item 8B – Significant Changes.”) There can be no assurance that the potential investor will agree to purchase a controlling share in the Company or that the conditions to closing of such transaction (which will require shareholder approval) will be obtained.

THE COMPANY’S OPERATIONAL PLAN FOR THE YEAR 2004

Following is a summary of the Company’s Operational Plan for the year 2004:

1. Finalize the sale of Marnetics Ltd. to Magal Ltd., or find an alternate purchaser if the proposed transaction with Magal Ltd. is not consummated. Since the operational plan was approved, the transaction was not consummated due to a failure to come to agreement in the negotiations.

2. If no agreement for the sale of Marnetics Ltd. is consummated, to seek a purchaser for all of Marnetics Ltd.’s Intellectual Property (technology) as well as for the sale of the Company’s fixed assets not in use.

3. Actively seek a purchaser for the shares of the Company who will bring new business to the Company, or who seeks an investment in the Company. The Company is currently considering an offer for the acquisition of a controlling interest in the Company by a third party which, if consummated, will result in such third party having a effective control of the Company. The proposal the Company is considering has been made along the guidelines detailed below, and if the negotiations are completed, consummation of the transaction will be subject to the receipt of all necessary approvals, including shareholder approval. In addition, the execution of the contemplated transaction will dependent upon the settlement and/or disposition of the proceedings involving Bank Hapoalim and Ananda Capital Partners Inc., to the satisfaction of the third party acquirer.

The guidelines for the proposed transaction are as follows: (a) a cash investment in the Company of $300,000 against issuance of shares according to a post-money valuation of $500,000; (b) continuing legal proceedings initiated by the Company and its subsidiary Marnetics Ltd. against the Municipality of Hod Hasharon and Mr. Strikovsky, with all funds recovered in such proceedings going to the benefit of the current shareholders of the Company.

4. File notice with the Securities and Exchange Commission (SEC) in order to enable the Company to cease SEC filings and reporting.

5. Legal proceedings:

•	Continue supporting the legal proceedings currently in progress against Mr. Dov Strikovsky and companies controlled by him, as well as those against the Municipality of Hod Hasaharon;
•	Continue defense in legal proceedings initiated against the Company, including those that have been threatened, Ananda Capital Partners Inc., or may be possibly initiated, Bank Hapoalim and/or the Municipality of Hod Hasharon..

6. Maintain bookkeeping, budgeting and the reporting of results.

7. Provide financial management for the maximization of yields on funds invested.

8. If a purchaser for the Company is not found prior to March 31, 2004, then to begin steps towards liquidation of the Company. For the year 2004, the Company forecasts the following utilization of its estimated cash balance of $230,000 as follows:

	Q1 2004		Q2-Q4 2004


Director fees		14,000		-

Salaries		24,000		6,000

Legal fees		50,000		45,000

Filing costs and related expenses		15,000		-

Outstanding taxes		-		64,000

Other		10,000		2,000


Total		113,000		117,000

Potential Purchaser of the Company

The Company is in negotiations with a third party acquirer interested in purchasing a controlling share in the Company, including Marnetics Ltd and its intellectual property. This would possibly bring a new direction to the Company. The Company is considering the proposal, which may be different to the Company’s Operational Plan for the Year 2004 (See Item 8B – Significant Changes.”) In addition, the execution of the contemplated transaction will be dependent upon the settlement and/or disposition of various legal proceedings the Company is involved in, to the satisfaction of the third party acquirer. There can be no assurance that the potential investor will agree to purchase a controlling share in the Company or that the conditions to closing of such transaction (which will require shareholder approval) will be obtained.

Reduction of Marnetics Business and Research and Development Activities

Approval of the Principles for the Sale of Marnetics Ltd.

The Board of Directors proposed to sell its wholly-owned subsidiary, Marnetics Ltd. (the “Subsidiary”), which has operated the core business of the Company in developing and marketing network capacity enhancement and network information analysis solutions for IP networks, to Magal Ltd. (“Magal”), a holding company of a group of leading Israeli companies in the field of data communications and infrastructure (the “Transaction”).

The Company received shareholder approval for the transaction in March 2004 but to date the negotiations have not been consummated.

The main principles of the proposed sale of Marnetics Ltd. to Magal, for which the Company sought shareholder approval, were as follows:

	•	The Company would sell to Magal its holdings in Marnetics Ltd., constituting the entire issued and outstanding share capital of the Subsidiary (the “Sale”).

	•	Prior to the Sale, certain assets recorded in the books of Marnetics Ltd. would be transferred to the Company for no consideration, which are mainly cash and cash equivalents, its holdings in Speedwise Ltd., and other fixed assets which would enable the Company to continue its operations as proposed after consummation of the Transaction. The remaining assets of the Subsidiary would be, mainly, all its intellectual property rights in and to the technology it has developed (the “Technology”) and certain of the fixed assets related thereto.

	•	Upon consummation of the Sale, Magal would assign to Marnetics Ltd. its exclusive rights to distribute and maintain 3Com Corporation’s (“3Com”) Faxport for workgroup (version 8.0) and WINport (version 8.0) software, as well as the worldwide exclusive right to use 3com’s distribution and service basis related to such software. In addition, Magal would assign to Marnetics Ltd. all the original source code, as well as source code developed in Israel.

	•	Upon consummation of the Sale, Marnetics Ltd. would waive repayment of the Company’s entire outstanding debt towards Marnetics Ltd. (approximately $2.2 million as of December 31, 2003).

•	Any monies received by Marnetics Ltd. subsequent to the sale to Magal, as a consequence of the lawsuit against the Municipality of Hod Hasharon, would be considered to be the property of the former owners of Marnetics Ltd. and would be transferred to the Company immediately upon receipt by Marnetics.

•	In consideration for its holdings in Marnetics Ltd., the Company would receive from Magal:

	•	Royalty fee payments equaling 5.5% of Marnetics Ltd.’s annual sales of products developed by Marnetics Ltd. prior to the Sale, and derivatives thereof, for a period of 5 years following the Sale (the “Royalties”);

	•	25% of the actual amounts saved by Marnetics Ltd. in income taxes, due to Marnetics’recorded deductible losses prior to the Sale, which are realized within 10 years of the Sale;

	•	10% of the consideration (in cash or securities) resulting from the sale, merger or IPO (Initial Public Offering) of Marnetics Ltd. or one of its parent companies, if occurring within 6 years following the Sale.

	•	If the Royalties actually received by the Company do not total $10,000 or more by the end of two years from the date of the Sale, the Company would have the joint, non-exclusive, but unlimited right to use the Technology for its own benefit.

The Transaction included several conditions to closing, chiefly, the completion of a due diligence examination of the Subsidiary by Magal, and the Company’s obtaining all the necessary consents, waivers and approvals required by law or otherwise to effect the Transaction, including that of the Office of the Chief Scientist in the Ministry of Trade and Industry. On August 18, 2003 the Company obtained the consent of principal of Bank Hapoalim Ltd. for the sale, which is required under the terms of the debentures securing the Company’s debt to the Bank.

The Board of Directors considered the consummation of the transaction for the sale of Marnetics Ltd. to Magal to be in the best interests of the Company and its shareholders and noted the following reasons:

	•	In light of the Company’s diminished financial resources and following lengthy efforts by management to continue the use and benefit of the technology developed by Marnetics Ltd., the offer made by Magal was the best and most serious proposal offered to the Company’s management at the time.

	•	The Company had an established relationship with Magal Ltd., through its affiliate Magalcom, a distributor of Marnetics Ltd.’s line of products, hence Magal is well aware of Marnetics’ potential. The Board considered this to be a marked advantage in realizing such potential.

	•	The Board also believed that Magal’s undertaking to incorporate its distribution activities of 3Com Corporation’s products with those of Marnetics Ltd. would further strengthen the marketability of Marnetics products through, among other things, exposure to Magal’s existing client base.

Following the consummation of the Transaction, the Company proposed to continue its operations for the main purpose of collecting outstanding debts owed to the Company by Mr. Dov Strikovsy and the Municipality of Hod Hasharon, regarding which the Company had initiated legal proceedings, as well as continue its defense in legal proceedings initiated against it, including those which have been threatened or may be possibly initiated. In the event that the Transaction is not consummated, for whatever reason, the Company proposed that in addition to the above, it shall continue to seek opportunities for the sale of the Subsidiary and its Technology and/or other transactions with respect thereto.

Delisting of Trading of Shares from the Amex

On January 31, 2003, the Exchange communicated to the Company that it had completed its review and determined to initiate de-listing proceedings.

By correspondence dated February 6, 2003, the Company appealed the Exchange’s determination and, in written submission dated March 9, 2003, the Company provided information in support of its request for review.

On March 25, 2003, a hearing was held before an Exchange Listing Qualifications Panel. By letter dated March 26, 2003, the Exchange notified the Company of the Panel’s determination that the Company’s common stock should be de-listed by the Exchange.

The AMEX suspended trading in the Company’s common stock effective April 1, 2003 and the Company did not appeal the Panel’s decision.

As from April 1, 2003 the Company’s shares began to be quoted on the Pink Sheets under the symbol MXBT.PK.

The Company is currently examining the possibility of terminating the registration of its ordinary shares under the Securities Exchange Act of 1934, hence ceasing its reporting obligations to the Securities Exchange Commission. The Company will make the required notifications and filings in accordance with the course of action that it shall adopt. It should be noted that if the Company will terminate the registration of its ordinary shares, certain information regarding the Company would no longer be available nor would it continue to be in its current form. Nevertheless, if registration is terminated, the Company will continue to be a public company under the Israeli Companies Law, and as such would still be required to prepare annual financial statements, have External Directors serving on its Board and Audit Committee, and all other requirements as detailed under the Company’s Law regarding public companies.

Sale of Electrical Business

Effective March 2001 (executed June 10, 2001) the Company sold to Idan Millenium Investments and Assets Ltd. (“IDAN’), a company under the control of Dov Strikovsky, a major shareholder and former President, Chairman and CEO of the Company, all the fixed assets, inventories, other assets and liabilities and related goodwill, in the amount of an appraised value of $2,000,000, relating to the electrical operations for a consideration of $597,000. The consideration is payable in 25 monthly installments of $24,000 commencing February 1, 2002. In May 2002 the Company signed an addendum with IDAN to change the terms of payments to such that the first 11 installment will be reduced to $7,000 each and the remaining 14 installments will be of $37,000. The Company, considering the collectibility probability, decided to establish an allowance on the amount not yet collected. During year 2002 Mr. Strikovsky repaid $71,000 on the account of the sale consideration. In year 2004 Mr. Strikovsky is involved in legal proceedings leading towards his filing for bankruptcy. If adjudged bankrupt, this will have a direct negative impact on the ability of the Company to collect the amounts due from him. (See “Item 7B – Related Party Transactions.”)

This summary highlights selected information about the Electrical Business purchase agreement and may not contain all of the information that is important to you. To understand the sale of the Electrical Business more fully and for a more complete description of the legal terms, you should read (See -“Item 7B – Related Transactions”), and the agreements, which are included as exhibits to the annual reports on Form 20-F for the fiscal years ended December 31, 2000 and December 31, 2001.

Legal Services Agreement

The Company entered into a legal services agreement with the offices of Advocate Oded Steiff for the provision of legal services in Israel to the Company, its wholly owned subsidiary Marnetics Ltd. and their officers and directors, as from December 31, 2003. Prior to December 31 2003, the Company received legal services for it on-going operations in Israel from the law firm of Haim Samet, Steinmetz, Haring & Co., which is affiliated with Holland & Knight LLP., the law firm which provided legal services to the Company mostly with regard to U.S. securities issues.

As a result of the Company’s financial restraints, and in light of the Company’s now limited scope of operations, the Company sought to enter into a long-term relationship, within a fixed fee structure, which will meet its expected legal needs, especially with regard to its ongoing litigation matters.

In addition, the legal services agreement that the Company entered into with the offices of Advocate Oded Steiff will meet the Company’s needs in lieu of obtaining D&O insurance, which the Company maintained in recent years, and which the Company’s finances can no longer support. The Company believes that the legal services agreement will be sufficient to cover those legal expenses that the Company may incur in regard to D&O claims arising from acts prior to entering into the agreement and which are covered under the Company’s previous D&O insurance, and that the scope of the legal services agreement proposed is reasonably sufficient to cover future claims that may arise.

The services to be rendered under the agreement proposed include both ongoing legal services (drafting of correspondence and agreements, legal representation in negotiations, etc.) as well as representation in court proceedings initiated against the above persons and entities, up to but not including evidentiary hearings.

The ongoing legal services will be provided for a period of seven years, beginning January 1, 2004, and are limited to 10 hours per month and representation in up to 6 claims.

In consideration for the above services, the Company will pay a sum of US$ 40,000 plus VAT (Value Added Tax) as a one-time non-refundable payment.

Item 9. The Listing

A. Listing Details

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

	Ordinary Shares Trading Prices

	High		Low

1998
Fourth Quarter (from November, 25, 1998)		US $6.125		US $4.875
1999
First Quarter		5.250		4.000
Second Quarter		4.125		1.750
Third Quarter		2.500		1.500
Fourth Quarter		3.500		1.330
2000
First Quarter		24.750		2.500
Second Quarter		15.750		6.750
Third Quarter		17.500		14.063
Fourth Quarter		14.500		6.313
2001
First Quarter		7.250		4.200
Second Quarter		4.600		1.10
Third Quarter		2.20		0.30
Fourth Quarter		0.90		0.35
2002
First Quarter		0.89		0.30
Second Quarter		0.44		0.20
Third Quarter		0.25		0.06
Fourth Quarter		0.18		0.06
2003
First Quarter		0.22		0.06

For the period from April 1, 2003 until July 6, 2004, the Company’s shares are traded on the Pink Sheets, and the high during this period was $0.16 and the low was $0.01. As at July 6, 2004, the shares were quoted at $0.03.

B. Markets

On January 31, 2003, the Exchange communicated to the Company that it had completed its review and determined to initiate de-listing proceedings.

The AMEX suspended trading in the Company’s common stock effective April 1, 2003 and the Company did not appeal the Panel’s decision.

As from April 1, 2003 the Company’s shares began to be quoted on the Pink Sheets under the symbol MXBT.PK.

C. Plan of Distribution

Not applicable.

D. Selling Shareholders

Not applicable.

E. Dilution

Not applicable.

F. Expenses of the Issue

Not applicable.

Item 10. Additional Information

A. Share Capital

Not applicable.

B. Memorandum and Articles of Association

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

On November 26, 2002, at the annual general meeting of shareholders, the shareholders of the Company amended Article 99 of the Articles of Association of the Company to provide to the fullest extent allowed under Israeli Companies Law a change of language to provide provisions which endeavor to limit personal liability of an office holder towards the Company and shareholders regarding insurance coverage, indemnification and exemption from duty of care. This amendment to the Articles of Association is included as an exhibit as revised articles of association to the annual report on Form 20-F for the fiscal year ended December 31, 2002.

Purposes and Objects of the Company

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

Powers of the Directors

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

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

Rights Attached to Shares

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

Dividend Rights

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

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

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

Voting Rights

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

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

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

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

Rights in the Event of Liquidation

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

Changing Rights Attached to Shares

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

General Meetings

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

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

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

Limitations on Foreign Shareholders to Hold or Exercise Voting Rights

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

Approval of Transactions under Israeli Law

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

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

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

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

Duties of Shareholders

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

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

Increase in Our Capital

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

C. Material Contracts

Services agreement with Netlogic Ltd., a company under the control of Mr. Menachem Reinschmidt, Director and Chairman of the Company effective December 2, 2001, dated February 11, 2002, and (ii) an Addendum to the Services agreement dated December 2, 2002 until June 2, 2003, a Second Addendum to the Services agreement for an additional period through December 31, 2003 and an extension until March 31, 2004. (See “Item 7B - Major Shareholders and Related Party Transactions – Related Party Transactions.”)

Mr. Reinschmidt and Mr. Sheetrit are receiving contingent compensation for the continued support of the Company’s Legal Proceedings of 9% each of any amounts awarded to the Company and/or its subsidiary, Marnetics Ltd in its action against the Municipality of Hod Hasharon. (See “Item 7.B. Related Party Transactions –Compensation for Coninued Support of Company’s Legal Proceedings.”)

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

Until September 2000 the Company held 33.6% of the outstanding shares of Speedwise Technologies Ltd (“Speedwise”). In September 2000, Speedwise issued shares to a third party resulting in a decrease in the Company’s holdings to 19.19% and during February 2001 additional shares were issued to third parties resulting in a further dilution to 14.73%. In October 2002 Speedwise sold its assets and intellectual property to a third party in consideration of cash and shares. Since then Speedwise has ceased operations but still owns the shares of the third party. Based on the consideration received by Speedwise, the Company assessed the recoverable amount of its investment in Speedwise at $60,000 and recorded an impairment charge of $522,000. For the year ended December 31, 2003 the Company, accepting a conservative approach, decided to write-off the remaining $60,000 value of its investment in Speedwise when it became apparent that the near-term ability to recover the assessed value of their third party shares was dependent upon uncertainties and contingencies. Any future income resulting from these shares will be recorded in the year in which monies are actually received. (See “Item 18 - Consolidated Financial Statements December 31, 2003”); also (See -”Item 7B - Major Shareholders and Related Party Transactions – Related Party Transactions.”)

Inter Company Loan Agreement between the Company and Marnetics where as Marnetics Ltd will grant the Company a loan of up to $500,000 dated September 2002. (See “Item 7B - Major Shareholders and Related Party Transactions – Related Party Transactions.”)

In March 2002, Marnetics signed a distribution agreement with Magalcom Communications & Computers Ltd. to become a non–exclusive distributor of Marnetics products in Israel. The agreement has terminated during June 2003. (See “Item 8B – Significant Changes” regarding negotiations to sell Marnetics to Magalcom.)

D. Currency Exchange Controls

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

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

E. Taxation

The following is a summary of the material Israeli and United States tax consequences, Israeli foreign exchange regulations and certain Israeli government programs affecting us. To the extent that the discussion is based on new tax or other legislation that has not been subject to judicial or administrative interpretation, there can be no assurance that the views expressed in the discussion will be accepted by the tax or other authorities in question. The discussion is not intended, and should not be construed, as legal or professional tax advice, is not exhaustive of all possible tax considerations and should not be relied upon for tax planning purposes. Each individual should consult his or her own tax or legal advisor as to the Israeli, United States or other tax consequences of the purchase, ownership and disposition of ordinary shares, including, in particular, the effect of any foreign, state or local taxes.

Tax Reform in Israel

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

General Corporate Tax Structure

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

On June 2, 2004, the Israel government introduced a bill to the Israel parliament proposing, among other things, changes to the corporate tax rate. The bill proposes to reduce the corporate tax rate from 36% to 35% for the 2004 tax year, 34% for the 2005 tax year, 32% for the 2006 tax year and 30% for the 2007 tax year and thereafter. In order to enact the bill as law, the bill must be approved by the Israel parliament and published. The bill might be modified prior to enactment or might not be enacted at all. Accordingly, we cannot predict the consequences of the bill to us.

Special Provisions Relating to Measurement of Taxable Income

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

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

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

Capital Gains Tax Applicable to Resident and Non-Resident Shareholders

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

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

In December 2003, regulations promulgated pursuant to the Tax Reform were amended so that, in certain circumstances, capital gains derived from the sale and subsequent (same day) repurchase of shares traded on the TASE or from shares of Israeli companies publicly traded on a recognized stock exchange or regulated market in a country that has a treaty for the prevention of double taxation with Israel, may be taxed at a rate equal to the withholding tax rate applicable to revenues derived from such sale. In accordance with an announcement published by the Israeli Income Tax Commission, the withholding tax rate applicable to the sale of such shares until the end of the 2003 tax year, which was equal at such time to 1% of the revenues generated in their sale, was determined as the final tax rate applicable to such sale. The amended regulations also determined that the day of such sale and repurchase shall be considered the new date of purchase of such shares. The forgoing was not applicable to: (i) dealers in securities; (ii) shareholders that report in accordance with the Inflationary Adjustment Law; (iii) shareholders who acquired their shares prior to an initial public offering; (iv) in some cases, shareholders that received their shares within the framework of an employer-employee relationship; or (iii) shareholders claiming a deduction for financing expenses in connection with such shares. The amended regulations further provided that with respect to shares of Israeli companies traded in a stock exchange outside of Israel, the market price determined at the close of the trading day preceding the day of the sale and repurchase of such shares, shall constitute the new tax basis for any future sale of such shares.

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

Taxation of Non-Resident Shareholders

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

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

Foreign Exchange Regulations

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

United States Federal Income Taxes

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

Dividends Paid on Ordinary Shares

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

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

Disposition of Ordinary Shares

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

Passive Foreign Investment Company Status

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

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

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

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

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

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

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

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

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

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

F. Dividends and Paying Agents

Not applicable.

G. Statement of Experts

Not applicable.

H. Documents on Display

The Company (formerly named Stav Electrical Systems (1994) Ltd.) is subject to certain of the informational requirements of the Securities Exchange Act of 1934 and the rules and regulations promulgated there under and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission. Reports, proxy statements and other information filed by the Company may be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N. W., Washington, D. C. 20549 and at the Regional Offices thereof at 233 Broadway, New York, New York and at 175 West Jackson Boulevard, Suite 900, Chicago, Illinois. Copies of such information can be obtained by mail from the Public Reference Section of the Commission at 450 Fifth Street, N. W., Washington, D. C. 20549 at prescribed rates. As a foreign private issuer, we became subject to the electronic filing requirements of Regulation S-T under the federal securities laws of the United States on November 4, 2002. Certain of our filings are available on the SEC’s website at http://www.sec.gov. In addition, we are not required under the Exchange Act to file periodic reports and financial statements with the SEC as frequently or as promptly as United States companies whose securities are registered under the Exchange Act.

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

A copy of each document concerning Marnetics Broadband Technologies Ltd. that is referred to in this Annual Report on Form 20-F, is available for public view at our principal executive offices at Marnetics Broadband Technologies Ltd., 10 Hayetzira Street, Ra’anana 43000, Israel.

I. Subsidiary Information

Not Applicable.

Item 11. Quantitative and Qualitative Disclosures about Market Risk

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

Interest Rate Risk. At December 31, 2003, the Company had cash and cash equivalents in the aggregate amount of $234,000 deposited primarily in major Israeli banks. These amounts accrue or bear nominal interest based on U.S. dollar interest rate and NIS interest rate.

Foreign Currency Exchange Risks. At December 31, 2003, more than 95% of the cash and cash equivalent were deposits denominated in NIS and linked to the US dollar exchange rate. Less than 5% of the Company’s current assets were cash deposits denominated in NIS. These amounts as presented in U.S. dollars may be affected by changes in the exchange rate between NIS and the U.S. dollars.

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

Item 12. Description of Securities Other than Equity Securities

Not applicable.

PART II

Item 13. Defaults, Dividend Arrearage and Delinquencies

None.

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

None.

Item 15. Controls and Procedures

(a) We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic filings with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms relevant to our Company. Within 90 days prior to the filing date of this Annual Report on Form 20-F, we have carried out an evaluation, under the supervision and with the participation of our management, including our active chairman of the board and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, acting chief executive officer and acting chief financial officer after evaluating the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended) as of December 31, 2003, have concluded that, as of such date, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the periods specified by the SEC’s rules and forms.

(b) There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation, nor were there any significant deficiencies or material weaknesses in our internal controls requiring corrective actions.

Item 16A. Audit Committee Financial Report

Our audit committee did have an audit committee financial expert, Mr. George Balot, as defined by Item 401(h) of the SEC’s Regulation S-K until June 2003, at which time Mr. Balot resigned from the audit committee to become the Acting Chief Financial Officer of the Company, effective June 15, 2003.

Under Israeli Companies Law every public company is required to retain the services of an independent internal auditor. Therefore, our Company continued to make use of the services of Mr. Yossi Barak, an Israeli CPA/MBA, whose has an understanding of generally accepted accounting principles and financial statements, who has the ability to assess the general application of such principles in connection with the accounting for estimates, accruals and reserves; experience preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by the registrant’s financial statements; and an understanding of internal control over financial reporting.

Item 16B. Code of Ethics.

The Company did not formally adopt a Code of Ethics and Business Conduct that apply to all our directors, officers and employees, including our principal executive officer and principal financial officer.

The Company began formulating its Code of Ethics and Business Conduct in the latter half of year 2003 to meet the SEC requirements. In the second quarter of year 2004, the Company began serious negotiations for the sale of the Company and anticipated ceasing its SEC reporting requirements. If negotiations with spotential purchaser do not materialize the Company will request permission to cease filing reports with the SEC.

Item 16C. Principal Accounting Fees and Services

	YEAR ENDED DECEMBER 31, 2003		YEAR ENDED DECEMBER 31, 2002

	AMOUNT ($ IN THOUSANDS)	PERCENTAGE	AMOUNT ($ IN THOUSANDS)	PERCENTAGE


Audit Fees	8,800	88%	11,189	90.3	%

Tax Fees	1,200	12%	1,200	9.7	%

	Notes:

	Comprises audit and tax fees to Brightman Almagor, independent public accountants in Israel, a member of Deloitte Touche Tohmatsu. These fees include fees paid for both the Company and its subsidiary Marnetics Ltd.

	Audit fees consist of services that would normally be provided in connection with statutory and regulatory filings or engagements, including services that generally only the independent accountant can reasonably provide.

	Audit-related fees relate to assurance and associated services that traditionally are performed by the independent auditor, including: accounting consultation and consultation concerning financial accounting and reporting standards.

	Pre-approval Policies and Procedures: Any services provided by Brightman Almagor that are not specifically included within the scope of the audit must be pre-approved by our audit committee prior to any engagement. None of the fees paid to Brightman Almagor were approved pursuant to a de minimus exception.

ITEM 16D. Exemptions from Listing Requirements of Audit Committee

Not yet applicable to the Registrant.

ITEM 16E. Purchase of Equity Securities by Issuer and Affiliated Purchasers

Not yet applicable to the Registrant

PART III

Item 17. Financial Statements.

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

Item 18. Financial Statements.

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

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page

Report of Independent Public Accountants	F-2
Consolidated Balance Sheets as of December 31, 2003 and 2002	F-3
Consolidated Statements of Operations or the years ended December 31, 2003, 2002, and 2001 and for the cumulative period from June 1, 1998 to December 31, 2003	F-4
Statements of Changes in Shareholders’ Equity for the years ended December 31, 2003, 2002 and 2001	F-5
Statements of Consolidated Cash Flows for the years ended December 31, 2003, 2002 and 2001 and for the cumulative period from June 1, 1998 to December 31, 2003	F-6 to F-8
Notes to the Financial Statements	F-9 to F-18

Item 19. EXHIBITS

1.1	Memorandum of Association of the Registrant (filed as Exhibit 3.1 to Form F-1 Registration Statement No. 333-8800 and by this reference incorporated herein).

1.2	Amended and Restated Articles of Associations of the Registrant (including revision for Amendment from November 26, 2002 reflected in amended wording to Article 99) (incorporated by reference to Exhibit 1.2 to the Company’s annual report on Form 20-F for the year ended December 31, 2002).

4.1	2001 Share Option Plan (incorporated by reference to Exhibit 4.1 to the Company’s annual report on Form 20-F for the year ended December 31, 2000).

4.2	Services agreement with Netlogic Ltd., a company under the control of Mr. Menachem Reinschmidt, Director and then Chief Executive Officer of the Company, effective December 2, 2001, dated February 11, 2002 (incorporated by reference to Exhibit 4.2 to the Company’s annual report on Form 20-F for year ended December 31, 2001).

4.3	Addendum to services agreement with Netlogic Ltd., a company under the control of Mr. Menachem Reinschmidt, current Chairman of the Board of the Company, dated December 2, 2002 (incorporated by reference to Exhibit 4.3 to the Company’s annual report on Form 20-F for the year ended December 31, 2001).

4.4	Second addendum to services agreement with Netlogic Ltd., a company under the control of Mr. Menachem Reinschmidt, current Chairman of the Board of the Company dated June 2, 2003 (incorporated by reference to Exhibit 4.4 to the Company’s annual report on Form 20-F for the year ended December 31, 2002).

4.5	Extension to the Service Agreement up until March 31, 2004 (incorporated by reference to “Item 6. Directors, Senior Managers and Employees – Compensation” in this annual report on Form 20-F).

8	List of subsidiaries (incorporated by reference to “Item 4 – Information on the Company – Organizational Structure” in this Annual Report on Form 20-F).

10.1	Form of officers’ and directors’ indemnification agreement (filed as Exhibit 10.3 to Form F-1 Registration Statement No. 333-8800 and by this reference incorporated herein).

10.2	Loan agreement between Bank Hapoalim Ltd. and the Registrant (filed as Exhibit 10.4 to Form F-1 Registration Statement No. 333-8800 and by this reference incorporated herein).

10.3	Promissory Note issued by Dov Strikovsky, the former President, Chairman and CEO of the Company, to the Company (filed as Exhibit 10.5 to Form F-1 Registration Statement No. 333-8800 and by this reference incorporated herein).

10.4	Share exchange agreement among Marnetics Ltd., its Shareholders and the Registrant dated as of May 31, 2000, as amended (filed as Exhibit 10.6 to Form 20-F for the year-ended December 31, 2000 and by this reference incorporated herein)

10.5	Indemnification agreement between Dov Strikovsky, the former President, Chairman and CEO of the Company, the Company and the former shareholders of Marnetics Ltd. dated as of June 30, 2001 (incorporated by reference to Exhibit 10.5 to the Company’s annual report on Form 20-F for year ended December 31, 2000).

10.6	Asset purchase agreement between the Company and Idan Millennium Investments and Assets Ltd. dated as of June 10, 2001 (incorporated by reference to Exhibit 10.7 to the Company’s annual report on Form 20-F for year ended December 31, 2000)

10.7	Amendment to the asset purchase agreement between the Company and Idan Millennium Investments and Assets Ltd. dated as of May 6, 2002 ((incorporated by reference to Exhibit 10.7 to the Company’s annual report on Form 20-F for year ended December 31, 2001).

10.8	Agreements to the assignment of debt by and among the Company, Bank Hapoalim Ltd. and Shlavor Systems Ltd. dated as of May 9, 2001 (incorporated by reference to Exhibit 10.9 to the Company’s Annual Report on Form 20-F for year ended December 31, 2000).

12.1	Certification of Chairman of the Board pursuant to Exchange Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

12.2	Certification of Acting Chief Financial Officer pursuant to Exchange Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

13.1	Certification of Chairman of the Board and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This document is being furnished in accordance with SEC Release No. 33-8212 and 34-47551.

SIGNATURES

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

	MARNETICS BROADBAND TECHNOLOGIES LTD.


	By:	/s/ Menachem Reinschmidt

		Menachem Reinschmidt, Chairman of the Board


	By:	/s/ George Balot

		George Balot, Acting Chief Financial Officer

Date: July 14, 2004

EXHIBIT 12.1

Certification of Chairman of the Board
pursuant to Rules 13a-14(a) (17 CFR 240.13a-14(a)),
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

CERTIFICATION

I, Menachem Reinschmidt, certify that:

1. I have reviewed this annual report on Form 20-F of Marnetics Broadband Technologies Ltd..;

2. Based on my knowledge, this 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 report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;

4. The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15e and 15d-15e) for the company and have:

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and

5. The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting.

Date: July 14, 2004

	/s/ Menachem Reinschmidt

	Menachem Reinschmidt Chairman of the Board

EXHIBIT 12.2

Certification of Chief Financial Officer
pursuant to Rules 13a-14(a) (17 CFR 240.13a-14(a)),
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

CERTIFICATION

I, George Balot, certify that:

1. I have reviewed this annual report on Form 20-F of Marnetics Broadband Technologies Ltd..;

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting.

Date: July 14, 2004

	/s/ George Balot

	George Balot Acting Chief Financial Officer

Exhibit 13.1

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 Marnetics Broadband Technologies Ltd. (the “Company”) on Form 20-F for the year ended December 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certify pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that to the best of our knowledge:

1.	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

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

		/s/ Menachem Reinschmidt

	Name: Menachem Reinschmidt Title: Chairman of the Board

		/s/ George Balot

	Name: George Balot Title: Acting Chief Financial Officer

Date: July 14, 2004

A signed copy of this written statement required by Section 906 has been provided to Marnetics Broadband Technologies Ltd. and will be retained by Marnetics Broadband Technoloiges Ltd. and furnished to the Securities and Exchange Commission or its staff upon request.

MARNETICS BROADBAND TECHNOLOGIES LTD.
(A Development Stage Company)

CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2003

MARNETICS BROADBAND TECHNOLOGIES LTD.
(A Development Stage Company)

CONSOLIDATED FINANCIAL STATEMENTS

CONTENTS

		Page


Report of Independent Public Accountants		F-2

Consolidated Balance Sheets as at December 31, 2003 and 2002		F-3

Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001 and for the cumulative period from June 1, 1998 to December 31, 2003		F-4

Statements of Changes in Shareholders’ Equity (Deficiency) for the years ended December 31, 2003, 2002 and 2001		F-5

Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001 and for the cumulative period from June 1, 1998 to December 31, 2003		F-6

Notes to the Financial Statements		F-9

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of Marnetics Broadband Technologies Ltd.

We have audited the accompanying consolidated balance sheets of Marnetics Broadband Technologies Ltd. (“the Company”) (a development stage company) as of December 31, 2003 and 2002, and the related consolidated statements of operations, shareholders’ equity (deficiency) and cash flows for the years ended December 31, 2003, 2002 and 2001 and the cumulative period from June 1, 1998 (date of commencement of operations) to December 31, 2003. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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 the Company’s management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the aforementioned consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company (a development stage company) as of December 31, 2003 and 2002, and its consolidated results of operations and its cash flows for the years ended December 31, 2003, 2002 and 2001 and the cumulative period from June 1, 1998 (date of commencement of operations) to December 31, 2003, in conformity with U.S. generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. Due to the lack of additional funds and the delay of potential orders, the Board of Directors of the Company decided to cease all activities of the Company (see Note 1b). The accompanying consolidated financial statements do not include any adjustments as a result.

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

Tel Aviv, Israel
July 8, 2004

F-2

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

CONSOLIDATED BALANCE SHEETS

	December 31,

	2 0 0 3			2 0 0 2


ASSETS

Current assets
Cash and cash equivalents	$	234		$	957
Trade accounts receivable		-			13
Other accounts receivable (Note 5a)		72			302

Total current assets		306			1,272


Investment in affiliate (Note 3)		-			60


Fixed assets (Note 4)
Cost		295			287
Less - accumulated depreciation		203			134

Fixed assets, net		92			153


	$	398		$	1,485


LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIENCY)

Current liabilities
Trade payables	$	3		$	19
Other liabilities and accrued expenses (Note 5b)		1,162			1,250

Total current liabilities		1,165			1,269


Accrued severance pay, net		-			8


Commitments and contingent liabilities (Note 6)

Shareholders’ equity (deficiency) (Note 7)
Share capital:
Ordinary shares of NIS 0.08 par value (Authorized - 25,000,000 shares, issued and outstanding - 7,362,390 shares at December 31, 2003 and 2002)		130			130
Additional paid-in capital		25,203			25,203
Deferred stock based compensation		-			(792	)
Accumulated deficit		(26,100	)		(24,333	)

Total shareholders’ equity (deficiency)		(767	)		208


	$	398		$	1,485

The accompanying notes are an integral part of the financial statements

F-3

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

	Year ended December 31,									Cumulative from June 1, 1998 date of (commencement of operations) to December 31,

	2 0 0 3			2 0 0 2			2 0 0 1			2 0 0 3


Revenue	$	4		$	19		$	-			$	23

Research and development costs, net (excluding $702 and $2,287 of non-cash compensation for the year ended December 31, 2003 and cumulative from June 1, 1998 to December 31, 2003, respectively) (Note 9a)		210			486			812				1,924
Sales and marketing expenses, net (Note 9b)		174			464			310				1,090
General and administrative expenses (excluding $90 and $2,510 of non-cash compensation for the year ended December 31, 2003 and cumulative from June 1, 1998 to December 31, 2003, respectively) (Note 9 c)		434			784			1,128				3,293
Provision for legal claim (Note 6b)		-			(500	)		750				250
Impairment of goodwill (Note 10)		-			-			9,309				9,309
Loss allowance on loan to related party (Note 11)		-			-			1,228				1,228
Collection of loan from related party (Note 11)		-			(266	)		-				(266	)
Write-down of investment in affiliate (Note 3)		60			522			-				582
Provision for a bank guarantee (Note 11)		-			716			-				716
Non-cash compensation expenses		792			792			805				4,797

Total costs and expenses		1,670			2,998			14,342				22,923

Operating loss		(1,666	)		(2,979	)		(14,342	)			(22,900	)

Financial income (loss), net		(101	)		32			175				290
Loss on sale of fixed assets		-			-			-				(28	)
Taxes on income		-			(74	)		-				(74	)
Share in losses of affiliate		-			-			-				(660	)

Loss from continuing operations		(1,767	)		(3,021	)		(14,167	)			(23,372	)

Discontinued operations
Loss from operations of electrical division		-			-			(450	)			(450	)
Loss on sale of electrical division		-			-			(2,278	)			(2,278	)

Loss for the period	$	(1,767	)	$	(3,021	)	$	(16,895	)		$	(26,100	)


Per share data (basic and diluted)(Note 2g)
Loss from continuing operations	$	(0.24	)	$	(0.41	)	$	(2.11	)

Loss from discontinued operations	$	-		$	-		$	(0.40	)

Loss for the period	$	(0.24	)	$	(0.41	)	$	(2.51	)

Number of shares used in computing loss per share (basic and diluted)		7,362,390			7,362,390			6,725,685

The accompanying notes are an integral part of the financial statements

F-4

MARNETICS BROADBAND TECHNOLOGIES LTD.
(A Development Stage Company)
(U.S.$ in thousands, except share data)
STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIENCY)

	Number of shares		Share capital		Additional paid-in capital		Deferred stock-based compensation				Accumulated deficit			Total


Balance at January 1, 2001		6,407,333	$	130	$	25,143		$	(2,329	)	$	(4,417	)	$	18,527

Amortization of deferred compensation									745						745
Compensation related to options granted to service providers						60									60
Issuance of shares for no consideration		955,057
Loss for the year												(16,895	)		(16,895	)


Balance at December 31, 2001		7,362,390		130		25,203			(1,584	)		(21,312	)		2, 437

Amortization of deferred compensation									792						792
Loss for the year												(3,021	)		(3,021	)


Balance at December 31, 2002		7,362,390		130		25,203			(792	)		(24,333	)		208

Amortization of deferred compensation									792						792

Loss for the year												(1,767	)		(1,767	)


Balance at December 31, 2003		7,362,390	$	130	$	25,203		$	-		$	(26,100	)	$	(767	)

The accompanying notes are an integral part of the financial statements

F-5

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

	Year ended December 31,									Cumulative from June 1, 1998 date of (commencement of operations) to December 31,

	2 0 0 3			2 0 0 2			2 0 0 1			2 0 0 3


Cash flows from operating activities:
Loss for the period	$	(1,767	)	$	(3,021	)	$	(16,895	)		$	(26,100	)
Adjustments to reconcile loss for the period to cash used in operating activities (Appendix A):		1,052			1,630			12,775				18,641

Net cash used in operating activities		(715	)		(1,391	)		(4,120	)			(7,459	)


Cash flows from investing activities:
Cash acquired in a non-cash reverse merger (Appendix B)		-			-			-				22
Purchase of fixed assets		(8	)		(20	)		(85	)			(346	)
Proceeds from sale of fixed assets		-			-			-				10

Net cash used in investing activities		(8	)		(20	)		(85	)			(314	)


Cash flows from financing activities:
Short-term debt, net		-			(50	)		(751	)			(801	)
Repayment of long-term loan		-			-			828				828
Issuance of share capital		-			-			-				7,981
Investment in affiliate		-			-			-				(1	)

Net cash provided by (used in) financing activities		-			(50	)		77				8,007


Increase (decrease) in cash and cash equivalents		(723	)		(1,461	)		(4,128	)			234

Cash and cash equivalents at the beginning of the period		957			2,418			6,546				-


Cash and cash equivalents at the end of the period	$	234		$	957		$	2,418			$	234

The accompanying notes are an integral part of the financial statements

F-6

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

APPENDICES TO CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year ended December 31,									Cumulative from June 1, 1998 date of (commencement of operations) to December 31,

	2 0 0 3			2 0 0 2			2 0 0 1			2 0 0 3


Appendix A
Adjustments to reconcile loss for the period to net cash used in operating activities:

Depreciation	$	69		$	70		$	53			$	265
Loss on sale of fixed assets		-			-			-				28
Accrued severance pay, net		(8	)		8			-				-
Share in losses of affiliate		-			-			-				660
Loss on sale of discontinued operations (Appendix C)		-			-			2,278				2,278
Impairment of goodwill		-			-			9,309				9,309
Loss allowance on loan to related party		-			-			1,228				1,228
Non-cash compensation expenses		792			792			805				4,797
Write-down for decline in value of investments		60			522			-				582
Provision for a bank guarantee		-			716			-				716
Changes in assets and liabilities:
Decrease (increase) in trade accounts receivable		13			(13	)		303				235
Decrease (increase) in other accounts receivable		230			(54	)		(235	)			(115	)
Decrease in inventories		-			-			684				684
Decrease in trade payables		(16	)		(116	)		(1,342	)			(1,439	)
Decrease in other liabilities and accrued expenses		(88	)		(295	)		(308	)			(587	)

	$	1,052		$	1,630		$	12,775			$	18,641


Appendix B
Purchase of a subsidiary in a reverse merger:

Current assets												4,947
Non-current assets												1,272
Fixed assets												474
Goodwill												11,309
Current liabilities												(6,497	)
Long-term liabilities												(213	)
Cash acquired												22

Total non-cash consideration											$	11,314

The accompanying notes are an integral part of the financial statements

F-7

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

APPENDICES TO CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year ended December 31,				Cumulative from June 1, 1998 date of (commencement of operations) to December 31,

	2 0 0 1				2 0 0 3


Appendix C
Sale of discontinued operations:

Current assets		$	1,076			$	1,076
Fixed assets			425				425
Goodwill			2,000				2,000
Current liabilities			(867	)			(867	)
Long-term liabilities			(356	)			(356	)


Loss on sale of discontinued operations		$	2,278			$	2,278



Information on non-cash transactions
Extinguishments of a short-term debt to bank in exchange for assignment of a receivable

Short-term debt		$	2,173			$	2,173
Assignment of a receivable			(2,173	)			(2,173	)


		$	-			$	-

The accompanying notes are an integral part of the financial statements

F-8

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

Note 1 - General

	a.	Marnetics Broadband Technologies Ltd. (formerly Stav Electrical Systems (1994) Ltd.) (“the Company or Stav”) is engaged in the development of capacity enhancement and traffic analysis solutions for IP networks through its wholly owned subsidiary Marnetics Ltd. (“Marnetics”) and was engaged in the manufacture, installation and maintenance of electrical and lighting systems, mainly for public institutions (see below).

		On June 1, 2000 a share exchange agreement (“the agreement”) was signed between the Company and Marnetics. The agreement was consummated after final approval of the Company’s shareholders on December 31, 2000. Pursuant to the agreement, the Company issued to the shareholders of Marnetics shares and options in the amounts of 4,993,048 and 1,761,236 respectively, representing 75% of its outstanding shares and options, on a fully diluted basis, in exchange for all shares in Marnetics.

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

		Effective March 2001 the Company sold to Idan Millennium Investments and Assets Ltd (“IDAN”), a company under the control of Mr. Strikovsky, former CEO and former chairman of the board, all the fixed assets, inventories, other assets and liabilities and goodwill related to the electrical operations for a consideration of $597,000 (see also Note 11).

	b.	The accompanying financial statements have been prepared assuming that the Company will continue as a going concern which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

		The Company has a limited operating history and has sustained losses since its inception. As shown in the accompanying financial statements, the Company incurred a net loss of $ 1,767 for the year ended December 31, 2003 and as of that date has accumulated loss of $ 26,100.

		In March 2003, in light of the financial position and liquidity considerations of the Company, the Company’s board of directors decided to cease all of the Company’s operations to lay-off most of the Company’s employees, to seek a potential purchaser for the subsidiary or its IP and to find a potential investor in the Company.

		The consolidated financial statements do not include any adjustments as a result.

Note 2 - Significant accounting policies

	a.	Development stage enterprise

		Since planned principal operations have not yet begun to generate any revenues, the Company is a development stage company. All pre-operating costs have been expensed as incurred.

	b.	Use of estimates in the preparation of financial statements

		The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

F-9

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

Note 2 - Significant accounting policies (cont.)

	c.	Financial statements in U.S. dollars

		The reporting currency of the Company is the U.S. dollar. The currency of the primary economic environment in which the operations of the Company are conducted is the dollar, and the dollar has been determined to be the Company’s functional currency.

		Transactions and balances originally denominated in dollars are presented at their original amounts. Non-dollar transactions and balances have been remeasured into dollars in accordance with the principles set forth in Statement of Financial Accounting Standards (“SFAS”) No. 52 “Foreign Currency Translation”. All exchange gains and losses from remeasurement of monetary balance sheet items resulting from transactions in non-dollar currencies are reflected in the statement of operations as they occur.

	d.	Cash equivalents

		Cash equivalents consist of short-term, highly liquid investments that are readily convertible into cash with original maturities when purchased of three months or less.

	e.	Fixed assets

		Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, as follows:

	Computers and software	3	years
	Furniture and fixtures	10-15	years

		The Company periodically assesses the recoverability of the carrying amount of property and equipment based on expected undiscounted cash flows. If an asset’s carrying amount is determined to be not recoverable, the Company recognizes an impairment loss based upon the difference between the carrying amount and the fair value of such assets, in accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”).

	f.	Research and development costs

		Research and development costs are expensed as incurred.

	g.	Earnings per share

		The Company has adopted Statement No. 128 of the FASB “Earnings Per Share” (SFAS 128”). Basic and diluted earnings per ordinary share are computed using the weighted average number of shares outstanding.

	h.	Deferred income taxes

		Deferred income taxes are provided for temporary differences between the assets and liabilities, as measured for financial statement purposes and for tax purposes, at tax rates expected to be in effect when these differences reverse.

	i.	Fair value of financial instruments

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

	j.	Reclassification

		Certain figures from prior years have been reclassified in order to conform to the 2003 presentation.

F-10

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

Note 2 - Significant accounting policies (cont.)

	k.	Recent accounting pronouncements

		In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities, an interpretation of ARB 51”. The primary objectives of this interpretation are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights (“variable interest entities”) and how to determine when and which business enterprise (the “primary beneficiary”) should consolidate the variable interest entity. This new model for consolidation applies to an entity in which either (i) the equity investors (if any) do not have a controlling financial interest; or (ii) the equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties. In addition, FIN 46 requires that the primary beneficiary, as well as all other enterprises with a significant variable interest in a variable interest entity, make additional disclosures. Certain disclosure requirements of FIN 46 were effective for financial statements issued after January 31, 2003. In December 2003, the FASB issued FIN 46 (revised December 2003), “Consolidation of Variable Interest Entities” (“FIN 46-R”) to address certain FIN 46 implementation issues. The effective dates and impact of FIN 46 and FIN 46-R are as follows: (i) Special-purpose entities (“SPEs”) created prior to February 1, 2003. The company must apply either the provisions of FIN 46 or early adopt the provisions of FIN 46-R at the end of the first interim or annual reporting period ending after December 15, 2003. (ii) Non-SPEs created prior to February 1, 2003. The company is required to adopt FIN 46-R at the end of the first interim or annual reporting period ending after March 15, 2004. (iii) All entities, regardless of whether an SPE, that were created subsequent to January 31, 2003. The provisions of FIN 46 were applicable for variable interests in entities obtained after January 31, 2003. The adoption of the provisions applicable to SPEs and all other variable interests obtained after January 31, 2003 did not have a material impact on the company’s consolidated financial position, consolidated results of operations, or liquidity.

		In April 2003, the FASB issued SFAS No. 149, “Amendment of SFAS No. 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. In particular, this Statement clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative. It also clarifies when a derivative contains a financing component that warrants special reporting in the statement of cash flows. SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003 and did not have a material impact on the Company’s financial statements.

		In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes standards for how a company classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify certain financial instruments as a liability (or as an asset in some circumstances). SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have an impact on the Company’s financial statements.

F-11

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

Note 3 – Investment in affiliate

Until September 2000 the Company held 33.6% of the outstanding shares of Speedwise Technologies Ltd (“Speedwise”). In September 2000, Speedwise issued shares to a third party resulting in a decrease in the Company’s holdings to 19.19% and during February 2001 additional shares were issued to third parties resulting in a further dilution to 14.73%. In October 2002 Speedwise sold its assets and intellectual property to a third party in consideration of cash and shares. Based on the consideration received by Speedwise, the Company assessed the recoverable amount of its investment in Speedwise at $60,000 and recorded an impairment charge of $522,000. As at the end of the year 2003 the Company, accepting a conservative approach, decided to write-off the remaining $60,000 value of its investment in Speedwise when it became apparent that the near-term ability to recover the assessed value of their third party shares was dependent upon uncertainties and contingencies. Any future income resulting from these shares will be recorded in the year in which monies are actually received.

Note 4 - Fixed assets

	December 31,

	2 0 0 3		2 0 0 2


Cost:
Computers and software	$	204	$	196
Leasehold improvements		51		51
Furniture and fixtures		40		40

	$	295	$	287

Accumulated depreciation:
Computers and software	$	179	$	118
Leasehold improvements		16		10
Furniture and fixtures		8		6

	$	203	$	134

Note 5 - Supplementary balance sheet information

Other accounts receivable

	December 31,

	2 0 0 3		2 0 0 2


Prepaid expenses	$	19	$	60
Restricted cash		28		30
Government authorities		13		199
Others		12		13

	$	72	$	302

Other liabilities and accrued expenses

	December 31,

	2 0 0 3		2 0 0 2


Wages and related accruals	$	10	$	82
Government authorities		12		98
Provision for a bank guarantee		716		716
Provision of legal claim		250		250
Other accrued expenses		174		104

	$	1,162	$	1,250

F-12

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

Note 6 - Commitments and contingent liabilities

	a.	Liens, security and guarantees

		The Company has obtained bank guarantees of $39,400, of which $28,000 are secured by a restricted deposit, in connection with the Company’s facilities operating lease agreement in Israel.

	b.	Legal claim

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

	c.	Royalties

		The Company is committed to pay royalties to the office of the Chief Scientist of the Government of Israel on proceeds from sales of products in the research and development of which the Chief Scientist has participated by way of grants, up to the amount of 100% of the grants received, in dollar terms plus interest at LIBOR. The royalties are payable at a rate of 3% for the first three years of product sales and 3.5% thereafter. No royalties were paid to the Chief Scientist.
		The total amount of grants accrued at December 31, 2003 was $220,000.

		The research and development grants are presented in the statements of operations as an offset to research and development costs.

		The refund of the grant is contingent on future sales and the Company has no obligation to refund these grants, if sufficient sales are not generated.

		Based on the terms established in the agreement with the OCS the Company may not sell its IP to a non-Israeli entity.

F-13

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

Note 7 - Shareholders’ equity (deficiency)

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

		Subsequent to the IPO, the Company’s ordinary shares were quoted and listed on the American Stock Exchange (AMEX). In April 2003 the AMEX had notified the Company that it no longer qualify for trading and that its shares would be deleted from trading on the AMEX. The Company’s shares are now traded on the Pink Sheets.

	b.	In January 2000, Marnetics issued 36,318 ordinary shares to an investor in consideration for $295,000. In addition, Marnetics granted the investor options to purchase 10,465 outstanding shares of the Company at $8.12 per share.

	c.	In February 2000, Marnetics issued 130,719 ordinary shares to ECI Telecom Ltd. for $2,000 thousand.

	d.	Through September 30, 2000, Marnetics had granted to specific employees options to purchase 40,437 ordinary shares of the Company’s subsidiary pursuant to their employment agreements. The exercise price of the options is $1. Most of the options vest over four years. As part of the share exchange agreement these options were replaced with 308,300 options to purchase ordinary shares of the Company (see also Note 8(f) below).

	e.	In October 2000 Marnetics reached an agreement with a group of new investors (the “Investors”). In accordance with the agreement, the Company issued to the Investors 221,200 ordinary shares in consideration of $5,076 thousand.

	f.	On June 1, 2000 a share exchange agreement (“the agreement”) was signed between the Company and Marnetics. The agreement was consummated after final approval of the Company’s shareholders on December 20, 2000. Pursuant to the agreement the Company issued to the shareholders of Marnetics shares and options in the amounts of 4,993,048 and 1,761,236 (including 308,300 options to employees of Marnetics) respectively, representing 75% of its outstanding shares and options, on a fully diluted basis, in exchange for all shares in Marnetics.

	g.	Pursuant to the agreement the Company issued newly unvested options to purchase 308,300 ordinary shares of the Company to the employees of Marnetics for their unvested options in Marnetics. In connection with this issuance, the Company recorded a deferred stock compensation expense totaling $1,836,000.

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

		The amount of options outstanding as at December 31, 2003 is 1,964,113 of which 187,221 were granted to employees.

	i.	During 2001, option granted to Marnetics certain shareholder in connection with the merger, were expired unexercised. According to the merger agreement such options must be divided pro-ratably between the formers shareholder of Marnetics. In 2001 the Company issued 955,057 shares which were divided pro-ratably according to the agreement.

F-14

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

Note 8 - Taxes on income

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

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

	Deferred taxes

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

	December 31,

	2 0 0 3			2 0 0 2


Deferred tax assets:
Net operating loss carryforwards in Israel	$	(3,089	)	$	(2,545	)
Less – Valuation allowance		3,089			2,545

Balance	$	-		$	-

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

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

	Tax loss carryforwards of the Company and its subsidiary company totalling US$ 8,597 thousand are unlimited in duration, denominated in NIS and linked to the Israeli consumer price index.

	Tax assessments

	The Company received final tax assessments through the tax year ended December 31, 1998.
	The Subsidiary received final tax assessments through the tax year ended December 31, 2002.

Note 9 - Supplementary statement of operations information

Research and development costs, net

	Year ended December 31,						Cumulative from June 1, 1998 (date of commencement of operations) to December 31,

	2 0 0 3		2 0 0 2		2 0 0 1		2 0 0 3


Salaries and related expenses	$	207	$	534	$	670		$	1,739
Subcontractors		13		-		-			73
Depreciation		63		61		53			140
Other		7		31		89			192

		290		626		812			2,144
Less - participation of the Government of Israel		80		140		-			220

	$	210	$	486	$	812		$	1,924

F-15

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

Note 9 - Supplementary statement of operations information

Sales and marketing expenses, net

	Year ended December 31,							Cumulative from June 1, 1998 (date of commencement of operations) to December 31,

	2 0 0 3		2 0 0 2		2 0 0 1			2 0 0 3


Salaries and related expenses	$	155	$	324	$	251			$	825
Subcontractors		-		64						64
Advertising and marketing costs		19		76		75				231


		174		464		326				1,120

Less - participation of the Government of Israel		-		-		(16	)			(30	)

	$	174	$	464	$	310			$	1,090

General and administrative expenses

	Year ended December 31,						Cumulative from June 1, 1998 (date of commencement of operations) to December 31,

	2 0 0 3		2 0 0 2		2 0 0 1		2 0 0 3

Salaries and related expenses	$	165	$	194	$	472		$	1,185
Professional services		118		291		321			1,069
Management fee		-		10		-			53
Others		151		289		335			986

	$	434	$	784	$	1,128		$	3,293

Note 10 - Impairment of goodwill

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

F-16

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

Note 11 –Transactions with related parties in previous years

a.	In prior years the Company granted loan to Mr. Strikovsky in the amount of $1,228,000. The loan was linked to the Israeli CPI and bore interest of 2% per annum and was repayable in eight annual installments each comprised of 1/8 of the principal and the accrued interest thereon commencing December 2000. At December 31, 2001 the Company reassessed the collectibility of the loan in accordance with provisions of SFAS No. 114 “Accounting by Creditors for Impairment of a Loan”, and resolved, considering the probability of its collectibility, to establish a loan loss allowance for the entire amount. During 2002 $266,000 were repaid on the account of the loan.

b.	(1)	On May 9, 2001 an agreement (the “Bank Agreement”) was signed between the Company and Bank Hapoalim, Ltd.(the “Bank”) with respect to the Company’s debt to the Bank in the amount of $3,127,000 (the “Debt”).
		In accordance with the Bank Agreement, the Bank has agreed to release the Company from its obligation to repay the Debt and to cancel the floating charge and liens registered in favor of the Bank on properties of the Company provided that, by May 31, 2001 the Company shall pay $954,000 to the Bank on account of the Debt (the “Repaid Amount”) and in addition the Company shall have assigned to the Bank all its rights with respect to the debt of the municipality of Hod Hasharon to the Company in the amount of $2,173,000. The Company paid the $954,000 and made the assignment in the aforesaid amount.
		In addition, the Company has provided the Bank with a guarantee of up to $716,000, which decreases in the ratio of NIS 1:2 paid on account of the outstanding debt of Hod Hasharon.
		Through December 31, 2002 Hod Hashron has not made any re-payment on account of the debt, and therefore the guarantee has not decreased. According to the terms of the Bank Agreement, following November 30, 2002, the Bank is entitled to exercise the outstanding amount of the guarantee, and since the guarantee has not decreased, the Company decided in 2002 to establish an allowance for the guarantee in full.
		Nevertheless, the Company and its representatives are conducting on-going negotiations with Hod Hasharon for the repayment of the debt to the Bank, although at present the Company cannot assess what portion of the debt will be recovered (and the guarantee decreased accordingly) as a result of such negotiations, or any future action by the Company. On November 20 2003, the Company filed suit against the Municipality of Hod Hasharon and its then head of the Engineering Department, in the sum of NIS 10,000,000 (approximately $2.2 million) (for court fee purposes), claiming that the negligence of and/or misrepresentations made by the Municipality at the time of the reverse merger transaction between the Company and Marnetics Ltd., in regard to the Municipality’s debt towards the Company, caused Marnetics Ltd. damages of some NIS 24,000,000 (approximately $5.33 million) between the years 2000 and 2002. On March 2004, the Municipality of Hod Hasharon filed a counterclaim for NIS 4.48 million for payment in excess of work and services provided.

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

	(3)	Effective March 2001 the Company sold to IDAN, a company under the control of Strikovsky, all the fixed assets, inventories, other assets and liabilities and related goodwill, in the amount of $2,000,000, relating to the electrical operations for a consideration of $597,000. The consideration is payable in 25 monthly installments of $24,000 commencing February 1, 2002. In May 2002 the Company signed an addendum with IDAN to change the terms of payments to such that the first 11 installment will be reduced to $7,000 each and the remaining 14 installments will be of $37,000. The Company, considering the probability of collection, decided to establish an allowance of $597,000 on the amount that was not collected. As of December 31, 2002 $71,000 were repaid on account of the sale consideration.

F-17

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

Note 11 –Transactions with related parties in previous years (cont.)

		(4)	To secure his obligations under the various agreements Mr. Strikovsky has collateralized 300,000 shares that he owns of the Company. No other payments were made by Mr. Strikovski subsequent to December 31, 2002.

		(5)	On September 10, 2003 the Company filed a lawsuit against Mr. Strikovsky and companies under his control for about NIS 3.2 million ($about $700,000), alleging default in loan repayment as well as amounts due from the sale of the Company’s electrical business. The Company obtained a court order for the seizure of certain notes credited to the defendants by the Municipality of Hod Hasharon.

			The defendants have not yet filed any defense motion.

			Following the failure of the defendants to file a defense motion the Company learned that Mr. Strikovsky filed a request for liquidation and has already begun the statutory steps required for that purpose; consequently, the Company asked the court to retrieve its lawsuit. Within the framework of the liquidation proceedings the first creditors meeting was called for July 14, 2004.

F-18