-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T1+cICAnw0vsbJuVtdOyKucVxYHFHQQTlQ5AlpGUTvZRiOYW7zPkwX0JoKhgXSLL KCcGzxQplVt9CdY3eo+9Xw== 0001178913-04-000813.txt : 20040622 0001178913-04-000813.hdr.sgml : 20040622 20040622080956 ACCESSION NUMBER: 0001178913-04-000813 CONFORMED SUBMISSION TYPE: 20-F PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040622 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IIS INTELLIGENT INFORMATION SYSTEMS LTD CENTRAL INDEX KEY: 0000742358 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER TERMINALS [3575] IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 20-F SEC ACT: 1934 Act SEC FILE NUMBER: 000-13012 FILM NUMBER: 04873589 BUSINESS ADDRESS: STREET 1: 33 JABOTINSKY ST STREET 2: RAMAF GAN ISREAL BUSINESS PHONE: 9724892077 MAIL ADDRESS: STREET 1: 33 JABOTINSKY STREET STREET 2: RAMAF GAN ISRAEL CITY: RAMAF GAN STATE: L3 ZIP: 00000 20-F 1 zk40782.htm

U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 20 F

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

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 No. 0 13012

I.I.S. Intelligent Information Systems Limited
(Exact name of Registrant as specified in its charter and translation of Registrant’s name into English)

ISRAEL
(Jurisdiction of incorporation or organization)

33 Jabotinsky Street, Ramat Gan, Israel
(Address of principal executive offices)

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

None

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

Ordinary Shares, NIS 0.003 par value per share
(Title of Class)

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

None

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, the Registrant had 11,572,398 Ordinary Shares, NIS 0.003 par value per share, outstanding (“Ordinary Shares”).

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

Yes o No o

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

Item 17 o Item 18 x

This Annual Report on Form 20-F contains historical information and forward-looking statements. Statements looking forward in time are included in this Form 20-F pursuant to the “safe harbor” provision of the Private Securities Litigation Reform Act of 1995. They involve known and unknown risks and uncertainties that may cause the Company’s actual results in future periods to be materially different from any future performance suggested herein. Further, the Company operates in an industry sector where securities values may be volatile and may be influenced by economic and other factors beyond the Company’s control. In the context of the forward-looking information provided in this Form 20-F and in other reports, please refer to the discussions of risk factors detailed in, as well as the other information contained in, this Form 20-F and the Company’s other filings with the Securities and Exchange Commission during the past 12 months.

TABLE OF CONTENTS

Item 1.	IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS	1

Item 2.	OFFER STATISTICS AND EXPECTED TIMETABLE	1

Item 3.	KEY INFORMATION	1

Item 4.	INFORMATION ON THE COMPANY	9

Item 5.	OPERATING AND FINANCIAL REVIEW AND PROSPECTS	17

Item 6.	DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES	26

Item 7.	MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS	32

Item 8.	FINANCIAL INFORMATION	34

Item 9.	THE OFFER AND THE LISTING	35

Item 10.	ADDITIONAL INFORMATION	36

Item 11.	QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	56

Item 12.	DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES	57

Item 13.	DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES	57

Item 14.	MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS	57

Item 15.	CONTROLS AND PROCEDURES	57

Item 16A.	AUDIT COMMITTEE FINANCIAL EXPERT	57

Item 16B.	CODE OF ETHICS	57

Item 16C.	PRINCIPAL ACCOUNTING FEES AND SERVICES	56

Item 16D.	EXEMPTIONS FROM THE LISTING REQUIREMENTS AND STANDARD FOR AUDIT COMMITTEE	57

Item 16E.	PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATES AND PURCHASERS	57

Item 17.	FINANCIAL STATEMENTS	58

Item 18.	FINANCIAL STATEMENTS	58

Item 19.	FINANCIAL STATEMENTS AND EXHIBITS	58

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 consolidated financial data of the Company as of December 31, 2003 and 2002 and for the three years ended December 31, 2003, are derived from the Company’s audited consolidated financial statements which are included in this Annual Report and have been prepared in accordance with U.S. GAAP. The selected consolidated financial data as of December 31, 2001, 2000 and 1999 and for the years ended December 31, 2000 and 1999 have been derived from audited consolidated financial statements not included in this Annual Report and have also been prepared in accordance with U.S. GAAP. The Selected Financial Data set forth below should be read in conjunction with and are qualified by reference to Item 5 (Operating and Financial Review and Prospects), and the Consolidated Financial Statements included elsewhere in this Annual Report.

Since December 2000, as a result of the decline of the Company’s interest in StoreAge Networking Technologies Ltd. (“StoreAge”) to 38.9%, the Company’s and StoreAge’s operations are no longer reported on a consolidated basis and the Company’s investment in StoreAge is accounted for in accordance with the hypothetical liquidation method. Investments in affiliates are investments in companies held to the extent of 20% or more (which is not a subsidiary), in which the Company can exercise significant influence over operating and financial policy. The investments in affiliates are accounted for by the equity method of accounting and in accordance with EITF 99-10 “Percentage Used to Determine the Amount of Equity Method Losses” which requires that an investor recognize equity method losses based on the ownership level of the particular investee security held by the investor, or the change in the investor’s claim on the investee’s book value.

Statement of Operations Data (in thousands, except per share data):

	Year Ended December 31,

	1999			2000			2001			2002			2003


Sales revenues	$	5,408		$	96		$	83		$	62			—
Revenues from research and development services to affiliate		—			—			251			145			—
Maintenance and other services		547			—			—			—			—
Total revenues		5,955			96			334			207			—

Cost of sales		4,484			27			28			38			—
Cost of revenues from research and development services to affiliate		—			—			155			51			—
Inventories write off		—			—			—			—			—
Cost of maintenance and other services		429			—			—			—			—
Total cost of revenues		4,913			27			183			89			—

Gross profit		1,042			69			151			118			—
Research and development costs, net		686			925			479			548			—
Selling and marketing expenses		1,417			639			21			49			—
General and administrative expenses		1,777			899			888			577			342
Write-off of trade receivables		—			—			—			—			—
Restructuring charges		467			—			—			—			—
Impairment of goodwill		—			—			—			186			—
Non recurring income		—			—			(180	)		(122	)		—
Other operating income		—			—			—			—			330
Operating loss		(3,305	)		(2,394	)		(1,057	)		(1,120	)		(12	)

Financial income (expenses), net from operation		173			277			(56	)		—			(3	)
Financial expenses from conversion of convertible debentures		—			—			(1,491	)		—			—
Financial income (expenses)		173			277			(1,547	)		—			(3	)
Other income (expenses), net		(1,770	)		(12	)		—			—			—
Loss before equity in losses of affiliate and minority interest in losses of subsidiaries		(4,902	)		(2,129	)		(2,604	)		(1,120	)		(15	)
Income taxes		—			—			—			—			—
Equity in losses of affiliate		—			—			(877	)		(1,250	)		(20	)
Minority interest in losses of subsidiary		55			740			—			—			—
Net loss	$	(4,847	)	$	(1,389	)	$	(3,481	)	$	(2,370	)	$	(35	)

Basic and diluted net earnings (loss) per share	$	(0.55	)	$	(0.16	)	$	(0.37	)	$	(0.21	)	$	(0.00	)
Weighted average number of shares used in computing basic and diluted net earnings (loss) per share (in thousands)		8,860			8,901			9,409			11,485			11,572

	At December 31,

Balance Sheet Data (in thousands):	1999		2000		2001		2002		2003

Working capital	$	5,590	$	2,254	$	1,024	$	198	$	212

Cash and cash equivalents		7,350		3,077		1,512		397		133
Total assets		8,496		6,349		3,233		549		335
Short-term bank credits		68		10		10		1		—
Long-term debt		122		2,839		1		—		—

Shareholders’ equity	$	2,757	$	1,882	$	2,535	$	252	$	217

B. Capitalization and Indebtedness.

Not applicable.

C. Reasons for the Offer and Use of Proceeds.

Not applicable.

D. Risk Factors.

An investment in the Company involves a high degree of risk. The following risk factors should be considered carefully in evaluating an investment in the Company. Since our only operating assets are minority holdings in StoreAge and Enargis Storage Solution Ltd. (“Enargis”), a number of the following risks relate to the Company’s investment in, and affiliation with, StoreAge and Enargis.

Our board of directors has proposed to shareholders to approve the voluntarily liquidation of the Company. The board of directors of the Company has proposed to the shareholders to approve the voluntary liquidation of the Company. The only operating assets of the Company are minority holdings in StoreAge and Enargis. As of June 15, 2004 the Company had approximately $200,000 in cash and short-term investments and no foreseeable prospects of income. The Company believes that it is in its best interests and those of its shareholders not to use the Company’s remaining cash to pay legal, auditing, listing fees, director fees, to maintain directors and officers liability insurance and other ongoing company expenses which can be avoided or reduced by voluntary liquidation, without harming the ability to realize the Company’s minority holdings in StoreAge and Enargis. The only remaining purpose of the Company is to achieve the greatest possible return on these assets. The Company believes that its holdings in StoreAge may have significant value but the current realization value is not attractive. From time to time StoreAge has been involved in contacts with prospective purchasers but these contacts have not yet resulted in any definitive offer or agreement. Consequently, it would be beneficial to the Company and its shareholders to continue to hold this asset until an attractive exit alternative presents itself and the voluntary liquation of the Company would allow the Company to continue to manage this investment at the lowest possible cost until such time. Without voluntary liquidation, the financial resources of the Company may be depleted by the end of 2004. In addition, due to the Company’s financial situation, it has not been able to retain most of its directors and to locate new directors in order to comply with applicable legal requirements. See Item 4 – Information on the Company - A. Proposal for Voluntary Liquidation and Item 6 – Directors, Senior Management and Employees.

In addition, due to the possible material effects of the proposed voluntary liquidation on the financial statements of the Company, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s auditors were unable to, and do not express an opinion on the Company’s financial statements for the fiscal year ended December 31, 2003. See the Company’s Consolidated Financial Statements included herewith.

If the voluntary liquidation of the Company is approved, our shares will cease to be publicly traded and no transfer of our shares will be permitted without the consent of the liquidators. Under Israeli law, upon approval of the voluntary liquidation by our shareholders no transfer of shares will be permitted without the consent of the liquidators. Consequently, there will be no public market for our shares. See Item 4 – Information on the Company - A. Proposal for Voluntary Liquidation.

We depend on StoreAge’s future success for future income. We are almost entirely dependent on the success of our StoreAge affiliate for future income and profits. We cannot assure you that StoreAge will prove commercially successful, or that our investment in StoreAge will be profitable. To date, StoreAge’s revenues have been very limited.

We have a history of substantial recurring losses and have no current prospects of revenues. We lost approximately $ 35,000 during the year ended December 31, 2003, $2.4 million during the year ended December 31, 2002, $3.5 million during the year ended December 31, 2001, $1.4 million during the year ended December 31, 2000, and $4.8 million during the year ended December 31, 1999. Our ability to achieve any future profits or gains depends entirely on the ability to realize significant value from our minority holdings in StoreAge and Enargis.

Since we have a minority ownership interest in StoreAge and Enargis, our interest in StoreAge’s and Enargis’ profits and our ability to direct their business affairs are limited. Our interest in StoreAge was reduced following StoreAge’s private placement, completed in January 2001, to a 38.9% ownership interest (approximately 30% on a fully diluted basis) (and may be further reduced). Cisco Systems, Inc., CDC Holdings Ltd., Morgan Keegan Entities, Genesis Partners, Koonras Technologies Ltd., The Challenge Fund and Ophir Tech Ltd. (together, the “Private Investors”), hold the remaining 61.1% ownership interest. A substantial portion of our holdings in StoreAge is in ordinary shares which are inferior to the preferred shares held by the Private Investors. Because we hold a diminished percentage interest in StoreAge, our shareholders also have a smaller indirect interest in StoreAge. We also do not control the board of directors of StoreAge. In addition, future financing needs of StoreAge are likely to require additional private or public equity financing, thus further diluting our ownership percentage. The significant ownership interest in StoreAge held by the Private Investors (which may be increased) and the rights granted to the Private Investors, including preferences in liquidation and receipt of dividends, registration rights and various negative covenants, will reduce the flexibility that we will have in the operation and any future disposition of StoreAge.

We have very limited cash resources and any additional raising of capital may lead to significant dilution. Since we presently do not expect to conduct future business other than holding minority interests in StoreAge and Enargis, we believe that our existing cash on hand will be sufficient to meet our working capital requirements, including normal capital expenditures, until at least December 31, 2004. In the event that we are unable to sell our holdings in StoreAge or Enargis by the time our financial resources are depleted, we may have to raise additional financing. Any additional financing may not be available when required or at acceptable terms and may result in significant dilution to our shareholders.

Future capital needs of StoreAge and Enargis will result in dilution of our holdings. As far as the Company is aware, StoreAge’s existing cash on hand will be sufficient to meet its working capital requirements, including normal capital expenditures, for at least the next 12 months. Enargis has been funded primarily from shareholder loans which are subject to repayment on demand. Continued losses could reduce StoreAge’s and Enargis’ working capital and cash equivalents, which could adversely affect their future operations unless they secure additional financing. In addition, StoreAge and Enargis may need to raise funds in order to finance their sales and marketing operations. If financing is not available when required or is not available on acceptable terms, StoreAge and Enargis may be unable to take advantage of business opportunities or respond to competitive pressures; however, the dilution resulting from any additional equity financing to StoreAge and Enargis will decrease the value of our holdings in such companies.

Competition from other companies that have greater resources than StoreAge and Enargis could adversely affect them. The markets in which the products of StoreAge and Enargis are being sold, especially in the United States, are highly competitive. Most of the competitors of StoreAge and Enargis have substantially greater financial, technical and marketing resources than these companies.

Our business prospects may suffer if StoreAge and Enargis are unable to keep up with the rapid technological developments in the storage industry. The market for StoreAge’s and Enargis’ products is characterized by rapidly changing technology and evolving industry standards. The introduction of new technologies and the emergence of new industry standards can render existing products obsolete and unmarketable. StoreAge’s ability to anticipate such changes and to develop and introduce successfully new and enhanced products on a timely basis will be a very significant factor in its ability to grow and to remain competitive. StoreAge will need to make substantial expenditures (including commitments to pay royalties) for research, development and introduction of new products. If either StoreAge or Enargis is unable, for technological or other reasons, to develop products in response to changes in the industry, its business and our prospects will be materially and adversely affected. We cannot assure you that StoreAge and Enargis will not encounter technical or other difficulties that could delay the introduction of new products in the future. If either StoreAge or Enargis is unable to introduce new products in response to changes in the industry, its business and the value of our holdings in such company will be materially and adversely affected.

If there are changes in StoreAge’s and Enargis’ future customers’ requirements, their business may suffer. The markets for computer and storage technology equipment are changing rapidly and often unpredictably. Changes in customer requirements and preferences, introduction or modification of new industry standards, or variations in the relative cost-effectiveness of different storage technology solutions could adversely affect its growth and future financial performance. If future customer requirements differ from those projected by StoreAge and Enargis, their future product sales would be adversely affected.

We currently do not comply with Israeli law board of directors and audit committee requirements. The Israeli Companies Law requires that we have at least two external directors who comply with certain criteria. In addition, the Israeli Companies Law requires that our audit committee must be composed of at least three directors, including both external directors. The chairman of the board of directors, any director employed by or otherwise providing services to us, and a controlling shareholder or any relative of a controlling shareholder, may not be a member of the audit committee. Since April 2003, we have not complied with these requirements due to the resignation of certain directors and our inability to attract additional directors. Since April 1, 2004 we do not maintain directors and officers insurance due to the cost involved. We can give no assurance that we shall be able to retain existing directors or attract new directors in order to comply with the applicable statutory requirements. See “Item 6. Directors, Senior Management and Employees.” In addition, none of the members of our audit committee meets the definition of an audit committee financial expert, as defined in Item 16A of Form 20-F.

Anti-takeover provisions could negatively impact our shareholders. Provisions of Israeli law may delay, prevent or make difficult an acquisition of our Company, which could prevent a change of control and therefore depress the price of our stock. Israeli corporate law regulates mergers and acquisitions of shares through tender offers in certain circumstances, requires special approvals for transactions involving significant shareholders and regulates other matters that may be relevant to these types of transactions.

Because our board of directors is classified, it could hinder a merger, proxy contest or tender offer, whether or not they would be beneficial to our shareholders. The classification of our board of directors could delay or impede the removal of incumbent directors and could therefore complicate a merger, tender offer or proxy contest involving us, even if such events would be beneficial to the interests of our shareholders, or could discourage a third party from attempting to acquire control of the Company.

A substantial number of our shares can be sold in the future under Rule 144, which could lower the price of our shares. Existing shareholders may sell Ordinary Shares pursuant to Rule 144 promulgated under the Securities Act of 1933, or otherwise. Such sales could adversely affect the price of the Ordinary Shares. We cannot predict the effect that future sales of the Ordinary Shares, or the availability of the Ordinary Shares for future sales, will have on the market price of the Ordinary Shares. Prevailing market prices for the Ordinary Shares could drop if substantial amounts of the Ordinary Shares are sold, or if others perceive that such sales could occur.

The delisting of our Ordinary Shares from the Nasdaq SmallCap Market has decreased the liquidity and increased the volatility of our Ordinary Shares. Our Ordinary Shares were delisted from the Nasdaq SmallCap Market effective January 23, 2003 and currently trade in the over-the-counter market. We received a Nasdaq Staff Determination on November 4, 2002, indicating that the Company has failed to comply with either the minimum $2,000,000 net tangible assets or the minimum $2,500,000 stockholders’ equity requirements for continued listing set forth in Nasdaq Marketplace Rule 4310(c)(2)(B). In accordance with applicable Nasdaq Marketplace rules, the Company requested a hearing, which effectively stayed the delisting. However, after submission of materials in support of the Company’s position, Nasdaq decided to delist the Company’s Ordinary Shares from the Nasdaq SmallCap Market as of the open of business on January 23, 2003. The delisting of the Company’s Ordinary Shares from The Nasdaq SmallCap Market has materially and adversely decreased the liquidity and market price of the Ordinary Shares, and may increase both volatility and the “spread” between bid and asked prices of the shares.

Our share price may be volatile. The market price of our Ordinary Shares may fluctuate following the announcement of financial results or new product introductions by StoreAge or Enargis or their competitors or other matters such as military, political or economic developments in the Middle East and the market for technology stocks generally.

Our financial results may be adversely affected by inflation and currency fluctuations. Since our functional currency is the U.S dollar and we report our financial results in dollars, fluctuations in rates of exchange between the dollar and non-dollar currencies may have a material adverse affect on our results of operations. The majority of our expenses are paid in NIS (primarily salaries) and are influenced by the timing of, and the extent to which, any increase in the rate of inflation in Israel over the rate of inflation in the United States is not offset by the devaluation of the NIS in relation to the dollar. We believe that the rate of inflation in Israel has not had a material adverse effect on our business to date. However, our dollar costs in Israel will increase if inflation in Israel exceeds the devaluation of the NIS against the dollar or if the timing of such devaluation lags behind inflation in Israel. Over time, the NIS has been devalued against the dollar, generally reflecting inflation rate differentials. Likewise, our operations could be adversely affected if we are unable to guard against currency fluctuations in the future. We do not currently engage in any currency hedging transactions intended to reduce the effect of fluctuations in foreign currency exchange rates on our results of operations. We cannot guarantee that we will not enter into such transactions in the future or that such measures will adequately protect us from serious harm due to the impact of inflation in Israel.

Our U.S. investors could suffer adverse tax consequences if we are characterized as a passive foreign investment company.

Based on our current and projected income, assets and activities, we believe that we may be considered a passive foreign investment company (“PFIC”) We would be a PFIC if either (i) 75% or more of our gross income is passive income, or (ii) at least 50% of the average value of all of our assets for the taxable year produce or are held for the production of passive income. For this purpose, passive income includes dividends, interest, royalties, rents, annuities and the excess of gains over losses from the disposition of assets which produce passive income. If we were determined to be a PFIC for U.S. Federal income tax purposes, highly complex rules would apply to U.S. Holders owning Ordinary Shares. Accordingly, shareholders are urged to consult their tax advisors regarding the application of such rules. Additionally, our U.S. shareholders should review “Item 10. Additional Information – Taxation- U.S. Federal Income Tax Considerations-Passive Foreign Investments Companies” for a more detailed description of the PFIC rules and how they may affect their ownership of our Ordinary Shares.

StoreAge’s and Enargis’ proprietary technology enjoys only limited protection; third party claims of infringement could harm their business. StoreAge has limited patent protection for its products. StoreAge and Enargis have attempted to protect their proprietary software and other intellectual property rights through trade secrets, nondisclosure agreements and other measures. StoreAge has applied for several patents for its technology. We cannot assure you, however, that StoreAge will receive these patents and/or be able to protect its proprietary software and other intellectual property rights adequately or that competitors, all of whom have legitimate access to any non proprietary technical standards utilized by StoreAge, will not be able to develop similar technology independently. For example, a number of StoreAge’s competitors are producing or plan to produce products that incorporate Virtualization technology. Enargis does not have any patents or patent applications.

Third parties may from time to time notify StoreAge or Enargis that it may be infringing patents owned by or proprietary rights of third parties, although no such claims are currently pending against StoreAge or Enargis. If necessary, StoreAge or Enargis may have to seek a license under any such patent or redesign or modify its products and processes in order to avoid infringement of such patents. There can be no assurance that such a license would be available on acceptable terms, if at all, or that StoreAge or Enargis could so avoid infringement of such patents, in which case the business of , financial position and results of operations of StoreAge and Enargis could be materially and adversely affected.

There has been substantial litigation in the technology industry regarding intellectual property rights, and litigation may be necessary to protect StoreAge’s and Enargis’ proprietary technology. It is also possible that StoreAge and Enargis will increasingly have to litigate infringement claims with companies in the storage system market, as the number of competitive products and companies grow. Any such claims or litigation may be time consuming and costly, cause product shipment delays, require StoreAge and Enargis to redesign or modify their products or require them to enter into royalty or licensing agreements, any of which could have a material adverse effect on their business, operating results or financial condition. Despite their efforts to protect their proprietary rights, unauthorized parties may attempt to copy aspects of StoreAge’s and Enargis’ products or to obtain and use information that they regard as proprietary. In addition, the laws of some foreign countries do not protect proprietary rights to as great an extent as do the laws of the United States. There can be no assurance that StoreAge’s and Enargis’ means of protecting its proprietary rights will be adequate or that their competitors will not independently develop similar technology or duplicate their products or designs.

StoreAge’s and Enargis’ business depends on a limited number of key personnel, the loss of whom could adversely affect them. The continued success of each of StoreAge and Enargis depends to a significant extent upon the performance of one of its senior executives. Neither StoreAge nor Enargis maintains key-man life insurance policies covering any of its executives. The loss of this senior executive’s services would likely have a material adverse effect on StoreAge or Enargis, as the case may be.

StoreAge depends on a limited number of key suppliers of key components to manufacture its products. StoreAge’s reliance on a limited number of suppliers for key components of its products, the absence of long term purchase agreements with those suppliers, the fact that StoreAge is likely to maintain only minimum inventory levels and the fact that there may be a significant market demand for those components involve several risks in addition to inadequate supply. These risks include potential price increases, selective supply allocations, late deliveries and poor component quality. We cannot assure you that StoreAge will not experience shortages of key components in the future or that StoreAge will not be subject to selective supply allocations and increased prices of components. Any shortage of key components and any delay or other difficulty in obtaining such components from other suppliers and integrating them into StoreAge’s products could materially and adversely affect StoreAge’s business, financial position and results of operations.

StoreAge depends on a subcontractor to manufacture its products. StoreAge depends on a subcontractor to manufacture its products. StoreAge’s future results of operations will be dependent in large part upon its ability to have products manufactured and delivered promptly upon the receipt of orders and to provide prompt and efficient service to its customers. As a result, any disruption of its day to day operations, or the day-to-day operations of its subcontractor, could have a material adverse effect upon StoreAge. StoreAge’s operations, including, research, marketing, customer service and distribution functions, are based in and managed from a single facility in Israel. It relies on the manufacturing facilities of a subcontractor that is based in and managed from a small number of facilities in Israel. A fire, flood, earthquake or other disaster or condition affecting these facilities could disable these functions. Any such damage to, or other condition interfering with the operation of, these facilities would have a material adverse effect on the business of StoreAge and its financial position and results of operations.

StoreAge and Enargis are subject to warranty claims for defective products. Products offered by StoreAge and Enargis may contain defects in hardware, software or workmanship and products offered by Enargis may contain software defects, in each case, that remain undetected until after commercial shipment. Any loss or delay in customer or market acceptance attributable to such defects or any material replacement or repair expenses due to any such defects could have a material adverse effect on their business, financial position and results of operations.

Planned international expansion by StoreAge and Enargis will expose them to new risks. Both StoreAge and Enargis intend to expand their operations internationally. These efforts will require significant management attention and financial resources. There can be no assurance that these efforts will be successful. Although sales are effected in U.S. dollars, international sales are subject to a number of risks, including longer payment cycles, unexpected changes in regulatory requirements, import and export restrictions and tariffs, the burden of complying with a variety of foreign laws, potentially adverse tax consequences, currency fluctuations, the imposition of currency exchange or price controls, and political and economic instability abroad.

Enargis has not achieved significant sales and its future is uncertain. Since its incorporation, Enargis has been financed by shareholder loans from related party, West End Technology Investments Ltd. (“West End”), which is owned and controlled by Robi Hartman, our Chairman of the Board and Chief Executive Officer and has not raised any funds through an external financing. Also Enargis has not attained significant sales revenues. In the event that Enargis does not succeed in raising funds in the near future, and West End ceases to finance it, it will be required to cease its operations. As of May 31, 2004 Enargis owes West End in excess of $112,000 with respect to shareholder loans. These loans are secured by charges on the assets of Enargis and are subject to repayment on demand. In addition, as of May 31, 2004 Enargis owes approximately $205,000 to officers and directors for unpaid compensation.

Risk Factors Relating to Our Operations in Israel

Conducting business in Israel entails special risks. We are incorporated under the laws of, and our executive offices and research and development facilities, and those of StoreAge and Enargis, are located in, the State of Israel. Although most of StoreAge’s and Enargis’ sales are made to customers outside Israel, it is nonetheless directly affected by the political, economic and military conditions affecting Israel. Any of StoreAge’s manufacturing operations would be heavily dependent upon components imported from outside of Israel. Any major hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners could have a material adverse effect on our business, financial condition and results of operations and that of StoreAge and Enargis. Since the establishment of the State of Israel in 1948, a state of hostility has existed, varying in degree and intensity, between Israel and the Arab countries. While Israel has entered into peace agreements with both Egypt and Jordan and several other countries have announced their intentions to establish trade and other relations with Israel, Israel has not entered into any peace arrangement with Syria or Lebanon. Since September 2000, Israelis and Palestinians have been engaged in violent conflict and the peace process between the parties has stagnated. Efforts to resolve the problem have failed to result in an agreeable solution. Since 2002 there has been a marked deterioration in the conflict, which culminated in several lethal suicide attacks in Israel and in response the Israeli Army called up a large number of reserve duty soldiers and has made incursions into most Palestinian-controlled cities and towns. The continued hostilities between the Palestinian community and Israel and the failure to settle the conflict has had and continues to have a material adverse effect on the Israeli economy and may have a material adverse effect on our business and that of StoreAge and Enargis. Further deterioration of hostilities might require more widespread military reserve service by our and StoreAge’s and Enargis’ employees that may have a material adverse effect on our business and that of StoreAge and Enargis. In addition, termination or reduction of certain governmental grants, programs and tax benefits could have a material adverse effect on StoreAge.

Most of our directors, officers and employees are obligated to perform annual military reserve duty in Israel and we cannot assess the potential impact of these obligations on our business. Our directors, officers and employees who are male adult citizens and permanent residents of Israel under the age of 48 are, unless exempt, obligated to perform annual military reserve duty and are subject to being called to active duty at any time under emergency circumstances. We cannot assess the full impact of these requirements on our workforce or business if conditions should change, and we cannot predict the effect on us if there is any expansion or reduction of these obligations.

Anti takeover provisions could negatively impact our shareholders. Some of the provisions of Israeli law could:

	•	discourage potential acquisition proposals;

	•	delay or prevent a change in control over us; and

	•	limit the price that investors might be willing to pay in the future for our ordinary shares.

Generally, under Israeli corporate law, a merger must be approved by the board of directors and the shareholders of each of the merging companies. If the share capital of the non-surviving company consisted of more than one class of shares, the approval of each class is also required. In certain cases, court approval is also required. Under the Companies Law, a merger may be completed only after 70 days have elapsed from the date all the necessary approvals and the merger proposals have been submitted to the Israeli Companies Registrar. The Companies Law also provides that an acquisition of shares of a public company must be made by means of a tender offer if, as a result of such acquisition, the purchaser would become a 25% or more shareholder of the company. This rule does not apply if there is already another 25% shareholder of the company. Similarly, the Companies Law provides that an acquisition of shares in a public company must be made by means of tender offer if, as a result of the acquisition, the purchaser would become a 45% shareholder of the company, unless someone else already holds a majority of the voting power of the company. These rules may not apply if the acquisition is made by way of a merger. The requirements of Israeli corporate law generally make these forms of acquisition significantly more difficult than under United States corporate laws. Other potential means of acquiring a public Israeli company might involve significant obstacles, such as a requirement for court approval for the acquisition. In addition, a significant body of case law has not yet developed with respect to many aspects of the new Companies Law. Until this happens, uncertainties will exist regarding its interpretation.

Item 4. INFORMATION ON THE COMPANY

A. Proposal for Voluntary Liquidation

The board of directors of the Company has proposed to the shareholders to approve the voluntary liquidation of the Company. The shareholders meeting is due to convene in July 2004. The only operating assets of the Company are minority holdings in StoreAge and Enargis. As of June 15, 2004 the Company had approximately $200,000 in cash and short-term investments and no foreseeable prospects of income. The Company believes that it is in its best interests and those of its shareholders not to use the Company’s remaining cash to pay legal, auditing, listing fees, director fees, to maintain directors and officers liability insurance or for other ongoing company expenses which can be avoided or reduced by voluntary liquidation, without harming the ability to realize in the future the value of the Company’s minority holdings in StoreAge and Enargis. The only remaining purpose of the Company is to achieve the greatest possible return on these assets. The Company believes that its holdings in StoreAge may have significant value but the current realization value is not attractive. From time to time StoreAge has been involved in contacts with prospective purchasers but these contacts have not resulted in any definitive offer or agreement. Consequently, it would be beneficial to the Company and its shareholders to continue to hold this asset until an attractive exit alternative presents itself and the voluntary liquation of the Company would allow the Company to continue to manage this investment at the lowest possible cost until such time. Without voluntary liquidation, the financial resources of the Company may be depleted by the end of 2004. In addition, due to the Company’s financial situation, it has not been able to retain most of its directors or to locate new directors in order to comply with applicable legal requirements.

The Board of Directors carefully reviewed the business affairs of the Company and all the directors were of the opinion that the Company can pay its debts within twelve months from the commencement of the voluntary liquidation. This is in part due to the fact that the directors and Mr. Robi Hartman, the current Chairman of the Board of Directors and CEO of the Company, who have not received any compensation from the Company since April 2003 have agreed that this compensation will be paid only from receipt of proceeds from the sale/exit of the Company’s holdings in StoreAge or Enargis or from raising additional financial resources.

The directors of the Company have agreed to file the appropriate affidavit of solvency with the Israeli Registrar of Companies prior to convening the general meeting of shareholders and, consequently, the voluntary liquidation, if approved by the Company’s shareholders, can be performed by the liquidators without court intervention.

The Board of Directors has recommended that two of the current directors of the Company, Robi Hartman and Aharon Jacobowitz, act as liquidators of the Company. Messrs. Hartman and Jacobowitz are both familiar with the business of the Company and its holdings in StoreAge and Enargis and Mr. Hartman has an incentive to maximize shareholder value due to his shareholding in the Company (currently 14.48% on a fully diluted basis). All decisions will require the consent of both liquidators. The Board of Directors proposes that the fee of the liquidators shall be $1,000 per month (plus VAT, if applicable), each commencing from the appointment of the liquidation at the Meeting and until distribution of all proceeds of the liquidation to the shareholders of the Company. This fee will be paid only out of the proceeds of the liquidation. This will constitute a significant saving of the operating expenses of the Company. In addition, the Company proposes that (i) Aharon Jacobowitz will receive an additional bonus as follows: $25,000 (plus VAT, if applicable) if the gross proceeds received by the shareholders of the Company is above $0.50 per share, $50,000 (plus VAT, if applicable) if the gross proceeds received by the shareholders of the Company is above $1.00 per share and $75,000 (plus VAT, if applicable) if the gross proceeds received by the shareholders of the Company is above $1.30 per share, and (ii) Mr. Hartman will receive an additional bonus $100,000 (plus VAT, if applicable) if the gross proceeds received by the shareholders of the Company is above $1.30 per share. Mr. Hartman will continue to receive compensation from StoreAge as long as he acts as the Chairman of the Board and/or acting Chief Financial Officer of StoreAge and the Chief Executive Officer of Enargis, as determined by StoreAge and Enargis, as the case may be. See Item 6. Directors, Senior Management and Employees - B. Compensation. It is further proposed that (i) the Company will indemnify the liquidators for any liability, costs and expenses (including legal costs and expenses) relating to claims or demands against them in their capacity as liquidators of the Company to the fullest extent permitted by applicable law and subject to the same restrictions and qualifications as currently applicable to indemnification of directors and officers of the Company, and (ii) the Company will waive any liabilities, claims, demands and causes of action against the liquidators in their capacity as liquidators of the Company to the fullest extent permitted by applicable law, with the exception only of actions constituting gross negligence or willful misconduct..

In connection with the voluntary liquidation (if approved by the shareholders), the Company also intends to seek no-action relief from the United States Securities and Exchange Commission with respect to certain reporting requirements under the Securities Exchange Act of 1934, as amended in order to reduce the operating costs of the Company relating to these reporting requirements. There can be no assurance that this relief will be granted.

Under Israeli law, upon approval of the voluntary liquidation by our shareholders no transfer of shares will be permitted without the consent of the liquidators. Consequently, there will be no public market for our shares.

B. History and Development of the Company.

Until early 1999, I.I.S. Intelligent Information Systems Limited (“IIS” or the “Company”) was engaged in the development, manufacture, marketing and service of data communication and intelligent peripheral products targeted at the International Business Machines (“IBM”) midrange, IBM mainframe and open systems computing environments. In late 1998, the Company implemented a restructuring plan (the “Restructuring”) which resulted in the disposition of most of the assets of the Company, substantial changes in the Company’s structure and a focus exclusively on storage area networking (“SAN”). For information regarding the Company’s products prior to completion (in early 1999) of the Restructuring, please refer to the Company’s Annual Report on Form 20-F for the fiscal year ended December 31, 1997.

In January 1999, StoreAge Networking Technologies Ltd., an Israeli company, (“StoreAge”) was organized as a wholly-owned subsidiary of IIS and commenced development and marketing of products based on its SAN Virtualization technology.

In January 1999, the Company divested itself of its 62.3% equity interest in NetWiz Ltd., an Israeli development-stage company (“NetWiz”). In the transaction, it transferred its entire interest in NetWiz to a non-affiliated third party and such non-affiliated third party assumed all liabilities associated with such interest. The divestiture required the Company to expend $945,000. Net gain realized as a result of the sale of NetWiz amounted to $616,000.

In February 1999, the Company disposed of its networking products and network integration services division, which was comprised of Adanet Communications, Ltd. (“Adanet”), an Israeli company which the Company acquired in June 1994, and I.I.S. Computer Maintenance and Services (1983) Limited (“I.I.S. Maintenance”), an Israeli company. The Company realized net proceeds of $1.506 million and net gain of $175,000 as a result of the sale of Adanet and I.I.S. Maintenance.

In March 1999, the Company sold most of the assets and the buyer assumed most of the liabilities of its Decision Data Division (“Decision Data”), which comprised all of the Company’s United States, United Kingdom and German operations. The Company realized net proceeds of $2.487 million and net gain of $205,000 as a result of the sale of Decision Data.

During November 2000, the Company acquired the assets of Eastek Embedded Systems (Meitav) Ltd. (“Eastek”), a private Israeli software company, to enhance its R&D capabilities in order to develop storage networking solutions for the SAN market with a focus on storage over IP [Need to define] applications.

In December 2000, the Company completed a private placement of $3 million in the issuance of convertible secured debentures and warrants to qualified investors. The net proceeds from the offering were used to fund the Company’s investment in StoreAge’s second round of financing.

On January 25, 2001, StoreAge completed its second round of financing, raising a total of $25 million from strategic and institutional investors in a private placement in two stages:

•

In December 2000, StoreAge issued 4,259,268 Preferred B shares for a total consideration of $14 million. The Company invested $4,220,000, which included the conversion of a $543,000 loan by the Company to StoreAge in 1999, in exchange of 1,283,866 Preferred B shares. Consequently, the Company’s equity interest in StoreAge was reduced to 49%. Thus, StoreAge’s operations were de-consolidated and the Company’s investment in StoreAge was accounted for using the equity method of accounting.


	•	In January 2001 StoreAge issued an additional 3,346,567 Preferred B shares for a total consideration of $11 million. The Company’s equity interest in StoreAge was further reduced to 38.9%

On March 31, 2003, the Company sold its iSCSI operations and related assets and liabilities on an “as-is” basis to Enargis, which is owned and controlled by Robi Hartman, our Chairman of the Board and Chief Executive Officer, and Danny Shavit, our previous Chief Technology Officer. Pursuant to the agreement, the Company received a 25% ownership interest in Enargis and the Company is entitled to commissions of 3% of certain revenues derived from existing customers or customers with which the Company had an existing relationship prior to the transaction (see Item 7. Major Shareholders and Related Party Transactions – B. Related Party Transactions).

Our only assets are the 38.9% (approximately 30% on a fully diluted basis) equity ownership in StoreAge and the 25% equity ownership in Enargis. StoreAge is a leader in Storage Virtualization Management technology which develops and provides storage networking solutions to the enterprise market with a focus on Storage Area Network (SAN) architecture. Enargis designs, develops and provides enterprise storage solutions for the Internet Small Computer Systems Interface (“iSCSI”). Enargis’ products are customized software implementation projects for the development and integration of iSCSI interface into existing storage devices and a family of comprehensive IP storage testing tools, for iSCSI protocol analysis of SAN devices. We do not have the ability to significantly influence the activities of StoreAge and Enargis either at the board of directors or shareholder levels.

IIS was incorporated in Israel in 1980. The executive offices of the Company are located at 33 Jabotinsky Street, Ramat Gan, Israel, its telephone number is (+972) 3-751-0007 and its facsimile number is (+972) 3-575-0595. The Company’s agent in the United States is Brown Raysman Millstein Felder & Steiner LLP located at 900 Third Avenue, New York, New York 10022.

C. Business Overview.

StoreAge

With the ever growing need for storage in computing systems, resulting among other things from the wide applications of Internet and Intranet technologies, coupled with the deployment of data warehouses and other decision support systems, the storage industry is changing its structure. Storage is developing into a separate industry, with information technology departments seeking to purchase storage systems independently from purchasing and upgrading computing environments. An additional aspect of the phenomenal growth of the installed storage is the increasing dependency of users on their storage systems and, hence, the requirement for high availability as well as protection from malfunctions and disasters.

With data growing at an exponential rate, it was inevitable that a logical method of data storage, retrieval and management be developed, thus the formation of storage area networks (“SANs”). A SAN configuration is typically based on a “fabric” of fibre channel cables, switches and hubs that provide the connectivity necessary to establish data patterns between a heterogeneous set of servers and storage devices on a many-to-many basis. This storage network helps companies gain a competitive edge by assisting them in the management of storage and the retrieval of the explosive growth of stored digital data. SAN provides users with the ability to quickly share information assets, regardless of their location, in any desired format. SAN technology enables the user to connect multiple hosts to multiple storage systems using a hub or a switch, making all storage systems accessible to all or specified servers.

The complexity, rapid growth and increased importance of data to mission-critical applications has led to the development of storage management software. This software allows IT managers to effectively manage and maintain the integrity of the data stored. The growing size and complexity of storage installations, combined with the rapid growth in the demand for storage, has made the administration of storage resources more challenging as administrators seek to solve the problem of assuring the availability of data across multiple platforms and geographies. Consequently, the storage management process now has much broader implications for many organizations. Enterprises now want integrated storage management solutions that provide centralized management of storage resources and support high data availability, scalability, and performance in heterogeneous environments.

In order to enable total focus on the new fast growing, large SAN and fibre channel market, in January 1999, IIS formed StoreAge, a separate entity whose sole purpose is to concentrate on storage networking development, production and marketing activities.

StoreAge’s goal is to be a leader in the storage networking industry. Its personnel has extensive experience in the design and implementation of leading edge technologies. Its mission includes the development and deployment of products and services in areas such as (i) Virtualization of storage networks for Open Systems (including Windows 2000, NT, Linux and UNIX), (ii) storage networking middleware (distributed RAID, volume management), (iii) storage management software, and (iv) storage related applications including disaster recovery and backup solutions, such as snapshot, remote mirroring and others. The innovative approach to enterprise storage systems proposed by StoreAge has attracted interest from original equipment manufacturers (“OEMs”), including those whose range of options do not include similar solutions. Therefore, StoreAge is employing an OEM, Value Added Resellers (“VAR”) and systems integrator market strategy, as opposed to a direct market strategy targeted at end users.

StoreAge seeks to make strategic alliances with major corporations that have developed customer bases, such as computing platforms manufacturers, networking platforms manufacturers and possibly storage systems manufacturers. Such strategic alliances and business cooperation may benefit StoreAge by providing it with promising distribution avenues, while introducing these partners to StoreAge’s advanced technology and products.

Enargis

Internet Small Computer Systems Interface (“iSCSI”) is a new protocol that is expected to eventually replace the “Fibre Channel” protocol currently being used for SANs. The advantage of the iSCSI is that it works with standard Ethernet (Fast and Gigabit Ethernet), the existing enterprise networking infrastructure built over many years for a Local Area Network (“LAN”). iSCSI enables the implementation of cost-effective and high-performance storage solutions designed for the SAN over regular Ethernet offering management and transfer of storage data without sacrificing ease of access.

IP storage is cheaper, easier to manage, and it removes the distance limitations of Fibre Channel. Microsoft’s backing of iSCSI, the adoption of standards and the appearance of iSCSI products, all point to the emergence of IP storage in 2004.

Not even iSCSI’s most ardent supporters expect it to replace Fibre Channel in 2004, or for a long time. They predict a period of coexistence where IP storage moves into low-end SANs and is used for secondary storage. Mainly, it will replace direct attached storage in smaller companies until, eventually IP-based storage networking takes over.

Market demand for iSCSI is quickly increasing. A recent research forecast by IDC entitled “Analyze The Future” predicted that the iSCSI array market will increase from $216 million in 2003 to nearly $2.48 billion by 2005, and to $5 billion in 2007. A number of factors are contributing to the growing appeal of iSCSI, including:

•	Ease of Deployment – iSCSI can be implemented anywhere IP networks are available.

•	IP Benefits – organizations can leverage the inherent management capabilities of IP including SAN management, Quality of Service, load-balancing, routing and security.

•	Based on Proven Technologies – iSCSI and Ethernet/IP are well established and enable organizations to leverage their existing IT infrastructure and knowledge.

•	Broad OS Support – Most operating systems (“OS”) vendors, including Microsoft, have pledged support for iSCSI, and the Storage Networking Industry Association’s IP Storage Forum expects that nearly all operating systems will offer iSCSI support.

Products and Systems

StoreAge

StoreAge’s family of products include the Storage Virtualization Manager (“SVM™”). StoreAge has developed the SVM™ as a SAN storage management solution. The SVM™ is a storage area network appliance that works with StoreAge’s proprietary software through the creation and allocation of virtual volumes (“virtualization”) to provide overall virtual volume management in a heterogeneous SAN environment. The SVM™ features physical device monitoring, volume definitions and virtual storage allocations for all servers and storage connected to the Fibre Channel loop or fabric. It provides a common graphical user interface (“GUI”) through which storage is virtualized and selectively presented to users in a flexible way. Unlike other competing management solutions, the SVM™ does not impose any performance degradation on the I/O traffic on a SAN.

The SVM™ serves as a platform for disaster and recovery and backup storage applications, such as remote mirroring and snapshot, and is a key enabler for functions such as serverless, LAN-free backup, shared file systems and multi-node clusters among other services that require a uniform overall view of and multiple access to all storage resources of the enterprise (“Storage Applications”).

The SVM™ enables the flexibility of a centrally managed highly scalable SAN without incurring degradation of performance or high cost of hardware. The SVM™ appliance can be a small and inexpensive unit since it does not have to conduct the actual data transfer. In the SVM™ based solution all storage is handled uniformly, independent of the type of storage subsystem or operating systems. Virtual volumes can be created, expanded, deleted, moved from server to server and assigned to multiple servers.

An important aspect of the SVM™ is that Storage Applications, in addition to human administrators (via the management GUI), can request volume allocations from the SVM™ appliance, giving a SAN new capabilities for improved data management. Applications such as Snapshot and others can create, expand and delete their own volumes, communicating directly with the SVM™.

The SVM™ delivers the following key functions critical for SAN management:

•	SAN manageability: A central point for managing entire SAN resources via a Web-enabled intuitive GUI effected through any standard browser and the ability to administer multiple RAID subsystems as if it was one large system (RAID pooling).

•	SAN Scalability: Unlimited SAN growth from a number of servers, storage capacity, I/O performance or bandwidth viewpoint.

•	SAN Security: Selective presentation of volumes to users with a fabric zoning control, which protects data from access via unauthorized path.

•	High Availability: Complete redundancy is supported. Modifications to the system are done on the fly without system re-boot. SAN bottlenecks are avoided due to multiple paths with load balancing and automatic failover.

•	Interoperability and Sharing: Volume masking enables sharing of storage among servers with different OS and FS. Volumes can be seen by more than one host, creating an ideal platform for shared file systems and clusters. Volumes can be moved from host to host (without copying).

•	Performance Enhancement: Striping across RAID subsystems for increased performance. Performance statistics help to facilitate removal of SAN bottlenecks.

SVM™ provides a central management point for storage virtualization while the data is directly transferred between the host computer and storage devices. This architecture meets all key requirements from a good virtualization scheme and in particular the total independence of the virtual storage from both the servers and the storage subsystems, thus creating true heterogeneous SANs. SVM™ provides significant scalability, performance, reliability and price advantages over alternative architectures. The SVM offers a particular advantage for high scale SAN installations (large number of servers) and demanding environments such as video and television related applications due to its extremely large number of devices supported and off the data path architecture.

Enargis

In June 2001, the Company launched the iSCSI SWAT (“iSWAT”™) software, an advanced suite of applications for enhanced development, testing and conformance of storage solutions based on the iSCSI communication protocol specification for the SAN. The iSWAT is designed for developers and vendors of iSCSI products. It leverages iSCSI development and creates a single test environment that incorporates all professional features and functionality required for error injection, validation and conformance testing. It emulates iSCSI environment components and traffic to simplify and shorten development and Quality Assurance (“QA”) processes. In November 2002, the Company ceased its iSCSI operations and issued dismissal letters to nine employees, including the Company’s Chief Technology Officer, Danny Shavit. The Company recorded one time charges of $186,000 for the impairment of goodwill and another $60,000 related to the cessation of the iSCSI operations. In March 2003, we sold our iSCSI operations to Enargis in consideration of 25% of the outstanding shares of Enargis (see Item 7. Major Shareholders and Related Party Transactions – B. Related Party Transactions).

Enargis offers a family of comprehensive IP iSCSI storage testing tools. In addition, Enargis provides solution software modules that enables the integration of iSCSI into existing storage devices, thus allowing vendors to provide IP storage networking features in their products. Enargis seeks to strengthen its position as an iSCSI based solutions provider and to find cooperation with at least one major OEM partner, several channel partners and network interface card (NIC) acceleration chips developers.

Enargis plans to perform beta installations of its storage solution products during 2004.

D. Organizational Structure.

The Company has one wholly-owned Israeli subsidiary, IIS Manufacturing Ltd., which is currently inactive.

In January 1999, StoreAge, an Israeli company, was organized as our wholly-owned subsidiary and commenced development and marketing of products based on Storage Area Network Virtualization technology. We currently hold 38.9% of the outstanding shares of StoreAge (approximately 30% on a fully diluted basis).

In March 2003, we sold our iSCSI operations to Enargis, and as a result, we currently hold 25% of the outstanding shares of Enargis (see Item 7. Major Shareholders and Related Party Transactions – B. Related Party Transactions).

E. Property, Plants and Equipment.

Our executive offices are currently located at 33 Jabotinsky Street, Ramat Gan, Israel, where we lease premises of 60 square meters and conduct all of our business activities. As of December 31, 2003, our annual rent was approximately $22,000, with total annual additional occupancy costs, including local taxes, utilities, maintenance and other costs of approximately $12,000. However, as of April 1, 2003, in connection with the sale of our iSCSI operations to Enargis (see Item 7. Major Shareholders and Related Party Transactions – B. Related Party Transactions), we reduced our leased premises by 65%, resulting in a reduction of our annual rent and additional occupancy costs to approximately $15,050 and $8,400, respectively.

Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

Forward-Looking Statements

Some of the information in this section contains forward-looking statements that involve substantial risks and uncertainties. You can identify these statements by forward-looking words such as “expect”, “anticipate”, “believe”, “seek”, “estimate” and similar words. Statements that we make in this section that are not statements of historical fact also may be forward looking statements. Forward-looking statements are not guarantees of our future performance, and involve risks, uncertainties and assumptions that may cause our actual results to differ materially from the expectations we describe in our forward looking statements. There may be events in the future that we are not accurately able to predict, or over which we have no control. You should not place undue reliance on forward-looking statements. We do not promise to notify you if we learn that our assumptions or projections are wrong for any reason. We disclaim any obligation to update our forward-looking statements. See “Risk Factors” for more information.

Critical Accounting Policies

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Under different assumptions or conditions, actual results may differ from these estimates.

Management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.

Intangible Assets and Goodwill

During November 2000, the Company acquired all the activities, assets and rights, and assumed certain obligations of Eastek. The excess cost over the fair value of net assets acquired was allocated to the assembled work force which was amortized on a straight-line basis over a three-year period. Through December 2001, the work force intangible asset was stated at cost, net of accumulated amortization. Amortization was calculated by the straight-line method over the estimated useful life (three years).

On January 1, 2002, the Company adopted Statement of Financial Accounting Standard No. 142 “Goodwill and Other Intangible Assets” (“SFAS 142”) and assigned the outstanding balance of workforce to goodwill.

During 2002, the Company performed the required impairment tests of goodwill’s fair value. At December 31, 2002 the entire goodwill was impaired and was written off.

Legal Contingencies

As discussed in Note 6.b to the Company’s Consolidated Financial Statements included herewith, the Company is involved in one legal proceeding. As of December 31, 2002, management has accrued its estimates of the probable costs for the resolution of this claim. Management arrived at this estimate after consultation with outside counsel handling the Company’s defense in this matter and is based upon an analysis of potential outcomes. Management does not believe this proceeding will have a material adverse effect on the Company’s consolidated financial position. It is possible, however, that future results of operations for any particular quarterly or annual period could be materially affected by changes in the Company’s assumptions and estimates related to this proceeding or the outcome of this proceeding.

Investment in StoreAge and Enargis

The Company currently holds a 38.9% interest in StoreAge (approximately 30% on a fully diluted basis) and a 25% interest in Enargis. In order to determine whether its investment in StoreAge experienced a decline in value (other than a temporary decline) and therefore required an impairment charge, management evaluated its investment based on its estimates, judgments and understanding of the economic environment in which StoreAge operates. During 2002, the Company discontinued applying the equity method when its investment in StoreAge was reduced to zero. The Company’s investment in Enargis has also been reduced to zero. The Company has not guaranteed the obligations of StoreAge and Enargis and is not otherwise committed to provide further financial support to any of these companies. See Note 2.f to the Company’s Consolidated Financial Statements included herewith.

Deferred Taxes

The Company records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. While the Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event the Company was to determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should the Company determine that it would not be able to realize all or part of its net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made.

A. Operating Results.

General

The Company currently holds a 38.9% equity interest in StoreAge. Since December 2000, the operations of the Company and StoreAge are no longer reported on a consolidated basis and the Company’s investment in StoreAge is accounted for using the equity method.

I.I.S. Intelligent Information Systems Limited is an Israeli company which designed, developed and provided enterprise storage solutions for the Internet Small Computer Systems Interface (“iSCSI”). The Company’s products were customized software implementation projects for the development and integration of iSCSI interface into existing storage devices and a family of comprehensive IP storage testing tools for iSCSI protocol analysis of storage area networking devices. In December 2002, the Company ceased its iSCSI operations.

The functional currency of the Company and its subsidiaries is the U.S dollar, as the U.S. dollar is the primary currency of the economic environment in which the Company and its subsidiaries have operated and expect to continue to operate in the foreseeable future. The majority of the Company’s operations are currently conducted in Israel and most of the Israeli expenses are currently paid in new Israeli shekels (“NIS”); however, most of the expenses are denominated and determined in U.S. dollars. Accordingly, monetary accounts maintained in currencies other than the dollar are remeasured into dollars in accordance with Statement of Financial Accounting Standard No. 52, “Foreign Currency Translation” (“SFAS No. 52”). All transaction gains and losses of the remeasurement of monetary balance sheet items are reflected in the statement of operations as financial income or expenses, as appropriate.

Results of Operations

Years Ended December 31, 2003, 2002, and 2001

Due to the cessation of the iSCSI operations in December 2002, the Company had no revenues in 2003 compared to $207,000 total revenues in 2002. In 2002, total revenues decreased by $127,000 or 38% to $207,000 compared to $334,000 in 2001. The decrease in 2002 was mainly as a result of the end of the research and development services project with StoreAge, a reduction in demand from the blind and impaired vision market in Israel (which the Company withdrew from in 2002) and the slow entry of the Company’s iSWAT testing tool into the market.

Revenues from sales and services to unaffiliated customers outside of Israel represented approximately 26% of revenues in 2002 and 5.7% of revenues in 2001. See Note 9 to the Company’s Consolidated Financial Statements for additional information regarding the geographic distribution of the Company’s revenues since 2001. The expanded ratio of revenues from unaffiliated customers outside Israel in 2002 is because of the reduced revenues derived from StoreAge in 2002 and the amount of such sales.

Gross profit as a percentage of total revenues was approximately 57.0% in 2002 compared to 45.2% in 2001. The increase in 2002 was primarily due to a reduction in cost of revenues from related parties. The decrease in 2001 was primarily due to less profitable research and development services fees from a related party (StoreAge).

Due to the cessation of the Company’s iSCSI operations in December 2002, there were no outlays for research and development in 2003. Total outlays for research and development increased to approximately $548,000 in 2002 from approximately $479,000 in 2001. The net cost to the Company of such outlays was $548,000 in 2002 compared with $479,000 in 2001. The increase in total outlays for research and development in 2002 was primarily a result of a reduction in income from StoreAge and the Company’s efforts to bring an off-the-shelf product to be used by new entrants into the iSCSI space, thus saving time and money that would have been spent in their research and development investment to bring their product into the market.

The Company allocated $60,000 of research and development expenses incurred in 2003 to its 2002 financial statements due to the fact that, even though the Company ceased all research and development activity in November 2002 and dismissed its research and development staff, the Company was required by contractual obligation (in one case) and Israeli law (in the two other cases) to keep these three employees employed into 2003 (March 17, 2003, and January 21, 2003 and February 23, 2003, respectively).

There were no selling and marketing expenses in 2003. The selling and marketing expenses in 2002 increased to approximately $49,000 (23.7% of revenues) in 2002 from $21,000 (6.3% of revenues) in 2001. The increase in selling and marketing expenses in 2002 was primarily related to the employment of a business development director (until July 31, 2002). General and administrative expenses decreased to approximately $342,000 in 2003 from approximately $577,000 in 2002 and from $888,000 in 2001. The decrease in general and administrative expenses in 2003 was primarily related to the cessation of our activities in the iSCSI-field and dismissal of related employees in 2002 and the decrease in 2002 was primarily related to the dismissal of one employee.

In 2002, in accordance with SFAS No.142, the Company determined that its entire goodwill was impaired and incurred a write-off of $186,000. The Company has not recorded any goodwill in its financial statements as of December 31, 2003.

The Company incurred non-recurring income of $122,000 in 2002, primarily as the result of the reversal of a $216,000 charge accrued in connection with settlement of a lawsuit against the Company.

During 1999, the Company recorded a provision for an estimated obligation to pay sales taxes in the U.S, in a total amount of $330,000. In late 2001, the Company reached a compromise settlement with the tax authorities in the U.S, according to which the obligation was reduced to $140,000. As a result, the Company recorded non recurring income in the amount of $10,000 and $180,000 during 2002 and 2001, respectively.

In 2003, the Company recorded an operating loss of approximately $12,000 compared with an operating loss of $1.12 million in 2002 and compared with $1.06 million operating loss in 2001. The 2003 operating loss reflects the cessation of the Company’s operations in the iSCSI field, one-time operating income of $330,000 derived from the settlement of a lawsuit and the absence of revenues in 2003. The 2002 and 2001 operating losses reflect the increased investment in iSCSI research and development and difficulty in generating revenues in the iSCSI field.

During 2003 the Company reached a settlement agreement with two of its former sub contractors. In accordance with this settlement, the Company received a total amount of $330,000 in order to resolve and release its claim filed with the District court of Tel-Aviv Jaffa on 1998 against these subcontractors and the counter claim filed against the Company by the sub contractors. The amount actually received by the Company, net of expenses was $330,000, of which $220,000 was received in 2003 and the remainder in January 2004.

The amount of $ 330,000 was recorded as part of other operating income in the statement of operations.

There were no taxes on our income in 2003, 2002 and 2001. See “Effective Corporate Tax Rate”.

As a result of the foregoing factors, the Company recorded a net loss of approximately $35,000, $2.37 million and $3.48 million in 2003, 2002 and 2001, respectively.

The Company does not expect to be profitable in the foreseeable future.

Impact of Inflation and Exchange Rates

The dollar cost of the Company’s operations in Israel is related to the extent to which the rate of inflation in Israel is offset by the devaluation of Israeli currency in relation to the dollar without significant timing delays. The Company’s dollar costs in Israel will increase if devaluation fails to keep pace with the rate of inflation. Conversely, those costs will decrease if the rate at which Israeli currency devalues against the dollar exceeds the rate of inflation in Israel on a relatively even basis.

Periodically, dependent upon inflation and other considerations, both fiscal and monetary, the Bank of Israel resets the target (middle of the range) exchange rate of the NIS in relation to a weighted basket of foreign currencies of Israel’s major trading partners and allows the actual exchange rate to float within a range determined by the Bank of Israel. During 2001, 2002 and 2003, the NIS was devalued (appreciated) approximately 7.02%, 13.02% and (1.63%), respectively, against the currency basket, and approximately 9.28%, 7.27% and (7.56%), respectively, against the U.S. dollar. Our operations could be adversely affected if we are unable to guard against currency fluctuations in the future. We do not currently engage in any currency hedging transactions intended to reduce the effect of fluctuations in foreign currency exchange rates on our results of operations. We cannot guarantee that we will not enter into such transactions in the future or that such measures will adequately protect us from serious harm due to the impact of inflation in Israel.

The relationship between the Company’s assets and liabilities in Israeli currency and whether they are linked to a foreign currency or price index also affects the Company’s financial results. In the past IIS has managed its exposure in Israeli currency so that unlinked liabilities generally exceeded unlinked monetary assets in Israeli currency. The Company cannot predict whether it will be able to continue to manage its assets and liabilities in this manner in the future.

Effective Corporate Tax Rate

The income tax obligations of IIS in Israel are based upon earnings determined for Israeli statutory purposes and not as determined from the amounts reported in dollars. Therefore, the provision for income taxes included in the financial statements does not directly relate to income shown on those statements.

As of December 31, 2003, the Company has carryforward tax losses in the amount of approximately $ 36,969,000, which may be carried forward and offset against taxable income in the future for an indefinite period. In addition, the Company has accumulated capital losses for tax purposes carryforward in a total amount of $ 35,684,000, which may offset against future capital gains for tax purposes for an indefinite period. The Company did not provide a deferred tax asset related to the capital losses balance. These losses have not been audited and approved by the relevant tax authorities.

Quarterly Results

The Company’s operating results in the near future may vary significantly from quarter to quarter, in part because of the substantial changes in the Company’s structure and a focus on SAN channel technology. The Company’s operating results for any particular quarter are not necessarily indicative of any future results. The nature of the Company’s industry and business has changed, and the accelerated and unpredictable pace of new product introduction and market trends, which is expected to continue, limits management’s ability to accurately forecast short-term results of operations. Furthermore, it is unlikely that the Company will ever be profitable in the future unless it can realize significant value from its minority holdings in StoreAge and Enargis and our board of directors has proposed to the shareholders to approve the voluntary liquidation of the Company. See Item 3 Key Information – D – Risk Factors “Our board of directors has proposed to shareholders to approve the voluntarily liquidation of the Company” and Item 4 – Information on the Company - A. Proposal for Voluntary Liquidation.

Governmental, Economic, Fiscal, Monetary or Political Factors

Our principal offices and our principal facilities, and those of StoreAge and Enargis, are located in Israel, and each of us is directly affected by the political, economic and military conditions to which that country is subject. Any of StoreAge’s manufacturing operations would be heavily dependent upon components imported from outside of Israel. A substantial majority of StoreAge’s and Enargis’ future sales, if any, will be made outside of Israel. Accordingly, our operations and those of StoreAge and Enargis could be materially adversely affected if major hostilities involving Israel should occur or if trade between Israel and its present trading partners were interrupted or curtailed. In addition, termination or reduction of certain governmental grants, programs and tax benefits could have a material adverse effect on us and StoreAge.

Political Conditions

Since the establishment of the State of Israel in 1948, a state of hostility has existed, varying in degree and intensity, between Israel and the Arab countries. While Israel has entered into peace agreements with both Egypt and Jordan and several other countries have announced their intentions to establish trade and other relations with Israel, Israel has not entered into any peace arrangement with Syria or Lebanon. Since September 2000 there has been a significant deterioration in the relationship between Israel and the Palestinian Authority, and as a result of riots in Gaza and the West Bank and ongoing terrorist attacks inside Israel, the peace process between the parties has stagnated. Efforts to resolve the problem have failed to result in an agreeable solution. Since 2002 there has been a marked deterioration in the conflict, with ongoing lethal suicide attacks in Israel and in response the Israeli Army has called up a large number of reserve duty soldiers and has made incursions into most Palestinian-controlled cities and towns. The continued hostilities between the Palestinian community and Israel and the failure to settle the conflict has had and continues to have a material adverse effect on the Israeli economy and may have a material adverse effect on our business and us.

Despite the peace between Israel and Egypt and Jordan, some countries, companies and organizations continue to participate in a boycott of Israeli firms and others doing business with Israel or with Israeli companies. Although we are precluded from marketing our products to such countries, we believe that in the past the boycott has not had a material adverse effect on us.

All male adult citizens and permanent residents of Israel under the age of 48 are, unless exempt, obligated to perform up to 30 days of military reserve duty annually. Additionally, all such residents are subject to being called to active duty at any time under emergency circumstances. Many of our officers and employees and those of StoreAge and Enargis are currently obligated to perform annual reserve duty. While we have operated effectively under these requirements since we began operations, we cannot assess the full impact of such requirements on our workforce or business if conditions should change, and we cannot predict the effect on us of any expansion or reduction of such obligations.

Economic Conditions

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

As a result of political instability, the increased level of hostilities with the Palestinian Authority and the world-wide economic crisis in the hi-tech and communication industries, during the last few years the Israeli rate of economic growth has deteriorated. The NIS was devalued against the dollar and the Euro during 2001 and 2002 but this devaluation has been reversed to a certain extent in recent months. Due to significant economic measures, including significant budgetary cuts and changes with respect to employee pension plans, proposed by the Israeli Government, there were several strikes and work stoppages during April and May 2003, which culminated in a three-day general strike, including all banks, airports and ports, in May 2003.

In addition, certain credit agencies such as Standard & Poor’s have announced that they are reviewing the credit rating of Israel. Should such agencies resolve to decrease Israel’s credit rating, the ability of the Israeli government to generate foreign financial and economic assistance may be adversely affected. We cannot assure you that the Israeli government will be successful in its attempts to stabilize the Israeli economy or to maintain the current credit rating of Israel. Economic decline as well as price and exchange rate instability may have a material adverse effect on us and on StoreAge and Enargis.

B. Liquidity and Capital Resources.

In late 1999, StoreAge completed a private placement of 707,558 convertible preferred shares to outside investors for a total net consideration of approximately $3.12 million. Accordingly, the Company’s equity interest in StoreAge was reduced to 58.56%.

In January 2001, as part of the aforementioned financing round, StoreAge issued an additional 3,346,567 Preferred B shares for a total consideration of $11 million. The Company’s equity interest in the outstanding shares of StoreAge was further reduced to 38.9% and no gain or loss from reduction of holdings was recorded .

During November 2000, the Company acquired the assets of Eastek to enhance its R&D capabilities in order to develop synergetic software solutions for the SAN market. The acquisition was completed through the issuance of 80,000 shares to Eastek and 100,000 shares to its founder, Danny Shavit.

In order to maintain its Nasdaq SmallCap Market listing during the 2002 fiscal year, the Company entered into an agreement dated as of December 5, 2001 to amend the Securities Purchase Agreement with the holders of its convertible secured debentures and warrants (the “Purchasers”) to exchange such securities for the Company’s Ordinary Shares and cash. Under the terms of the agreement, the Purchasers converted part of the debentures, the warrants and the floating charge registered on the Company’s assets were cancelled and the Company repaid the Purchasers the principal amount of the debentures which was not converted, plus interest accrued up to the date of the agreement.

Under the terms of the transaction, the Purchasers converted $2,426,576.40 principal amount of the debentures into an aggregate of 1,797,464 of the Company’s Ordinary Shares, received a cash payment of $573,423.60 and relinquished all of the warrants. The warrants and the remaining debentures were cancelled. In addition, the Purchasers waived their lien on our shares in StoreAge . The transaction represented an implied exchange value of at least $1.35 per Ordinary Share based solely on the debt amounts extinguished, without giving any effect to the cancelled warrants, and represented a substantial premium over the market price of the Company’s Ordinary Shares at the time the agreements in principle with the Purchasers were reached.

As a result of the completion of the transaction in December 2001, the Company had, at that time, sufficient shareholders’ equity and net tangible assets to meet the requirements for continued inclusion on the Nasdaq SmallCap Market. However, the Company was subsequently delisted from the Nasdaq SmallCap Market effective January 23, 2003, for failure to continue to meet these requirements.

The Company had cash and cash equivalents of approximately $133,000 at December 31, 2003, $397,000 at December 31, 2002 and $1.512 million at December 31, 2001. The ratio of current assets to current liabilities was 2.94:1.00 at December 31, 2003, 1.68:1.00 at December 31, 2002 and 2.52:1.00 at December 31, 2001. The decrease in the current ratio in 2002 and 2003 is mainly a result of a reduction in the amount of accounts receivable and a reduction in cash due to operating activities. The increase in the current ratio in 2001 was primarily due to elimination of certain liabilities, including $180,000 with respect to sales tax in the United States that the Company recorded as non-recurring income. For a discussion of the primary currency in which the operations of the Company are conducted see Item 5.A., “Operating Results,” above.

In 2003, the Company recorded a net negative cash flow from operations of approximately $273,000 (after taking into account the receipt of $220,000 from the settlement of a lawsuit) compared to a net negative cash flow from operations of approximately $(1.10) million in 2002. In 2001, the Company recorded a net negative cash flow from operations of approximately $(1.68) million. Net cash flow from operations in 2001, 2002 and 2003 was adversely affected by the operating losses during those years.

The Company anticipates that its existing cash on hand, will be sufficient, at the business levels presently projected, to meet its working capital requirements, including normal capital expenditures, until at least December 31, 2004 and until at least July 2005 if the voluntary liquidation of the Company is approved by its shareholders. See Item 4 – History and Development of the Company. However, unless the Company can realize significant value from its holdings in StoreAge and Enargis prior to the depletion of its cash resources, continued losses from operations will reduce the Company’s working capital and cash equivalents to a level which will adversely affect the Company’s future operations.

StoreAge has been granted an “approved enterprise” status under the Israeli law and has elected to enjoy the “alternative system of benefits” - waiver of grants in return for tax exemption. Income derived from approved enterprises is tax exempt for a period of two years out of a 7-year period of benefits (based on the percentage of foreign ownership in each taxable year). Income derived during the remaining five years of benefits is entitled to reduction in tax rates. The period of benefits commences with the first year in which StoreAge has realized a taxable income. The period of benefits relating to the approved enterprise will expire in the years 2012 through 2014.

The entitlement to the above benefits is conditional upon StoreAge’s fulfilling the conditions stipulated by the law, regulations published thereunder and the instruments of approval for the specific investments in “approved enterprises”. In the event of failure to comply with these conditions, the benefits may be canceled and StoreAge may be required to refund the amount of the benefits, in whole or in part, including interest.

If the tax-exempt income attributable to the approved enterprise is distributed in a manner other than in the complete liquidation of StoreAge, it would be taxed at the corporate tax rate applicable to such profits as if StoreAge had not chosen the alternative system of benefits (currently - 25%).

Income not eligible for “approval enterprise” benefits as mentioned above is taxed at the regular rate of 36%.

The Company does not control StoreAge and consequently has no ability to receive loans or advances from StoreAge. In the event that StoreAge is sold, liquidated, or becomes bankrupt, (i) the holders of the Series B preferred shares (including the Company) are entitled to receive (prior to any distribution to any other holders of StoreAge’s securities) an amount equal to their original investment plus 8% per annum, compounded annually, and (ii) the holders of the Series A preferred shares (including the Company) are entitled to receive (prior to any distribution to the holders of StoreAge’s Ordinary Shares) an amount equal to their original investment.

C. Research and Development, Patents and Licenses, etc.

Since December 31, 2002 we have not carried out any research and development activities. We currently hold no patents, licenses and other intellectual property assets. The Company spent $548,000 and $479,000 on research and development activities during 2002 and 2001, respectively.

D. Trend Information.

StoreAge and Enargis are start-up companies. StoreAge began to sell its products in 2001 and Enargis in 2003. As a result of this limited history, there are no trends yet known to the Company that are likely to have a material effect on the Company’s revenues, income from continuing operations, profitability, liquidity or capital resources. For additional information please see the “Risk Factors” listed in Item 3 above.

E. Off-Balance Sheet Arrangements.

All of the Company’s directors have agreed that compensation for services due to them since April 1, 2003 will be paid only from receipt of proceeds from the sale/exit of our holdings in StoreAge, or Enargis or from raising additional financial resources. As of December 31, 2003 the amount of this unpaid compensation was approximately $95,000. This amount does not appear in the Company’s financial statements for the year 2003 as an expense. See Note 6.c to the Company’s Consolidated Financial Statements.

F. Tabular Disclosure of Contractual Obligations

Not applicable.

Item 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A. Directors and Senior Management.

The Company’s executive officers and directors as of June 10, 2004 were as follows:

Name	Age	Position with the Company

Robi Hartman	43	Chairman of the Board, Director, Chief Executive Officer and Acting Chief Financial Officer
Aharon Jacobowitz*	54	Director
Jonathan Nativ*	56	External Director


	*	Member of the Audit Committee and Compensation Committee

Robi Hartman has been a Director of the Company since September 1998, Vice Chairman of the Board from October 1998 to March 2000, Acting Chief Financial Officer since December 1998, and Chairman of the Board and Chief Executive Officer of the Company since March 2000. Before joining the Company, from 1987 to 1996, Mr. Hartman was the manager of Teledata Communications Ltd., a leading supplier of advanced access solutions, beginning as a manager and progressing to the Chief Financial Officer and finally as Chief Executive Officer and President. From 1996 to 1997, Mr. Hartman was the President of VCON Telecommunications, a pioneer in PC based teleconferencing. Since 1997 he owns and manages West End Technology Investments Ltd. Mr. Hartman received his B.A. in Economics and Political Science from Bar Ilan University and his Masters degree in Business Administration (MBA) from Bentley College.

Aharon Jacobowitz has been a director of the Company since May 1995. Since 1989, Mr. Jacobowitz has been a management consultant to large organizations on data processing issues. His clients include the Accountant General, Ministry of Finance, State of Israel, General Manager of the Social Security Institute in Israel and Teva Pharmaceutical Industries Ltd., the largest pharmaceutical manufacturer of Israel. Prior to 1989, Mr. Jacobowitz was employed for 14 years in various capacities in the marketing division of IBM Israel Ltd. His main specialties were networking and midrange systems. Mr. Jacobowitz is a member of our Audit Committee.

Jonathan Nativ has been a director of the Company since November 2000. Mr. Nativ was elected as an external director in accordance with the Israeli Companies Law. He has served since 1997 as the Chief Executive Officer of Compwise Ltd., a company that develops, markets and sells special-purpose software for tariff modeling and analysis and auditing solutions to telecommunications companies, particularly those involved in wireless telecommunications. From 1978 until 1983, he served as project manager at Tadiran Ltd. (Telecommunications Division), one of Israel’s leading electronics firms. From 1983 to 1995, Mr. Nativ served as the Director of Research and Development, Executive Vice President of Marketing, and Executive Vice President of Strategy and Business Development at Teledata Communications Ltd., a leading supplier of advanced access network solutions to telecommunication network operators worldwide. From 1995 to 1997 he served as a consultant to Teledata Communications Ltd. Mr. Nativ serves as director of TDSoft Ltd. and other Israeli technology-based companies. Mr. Nativ earned a bachelor’s degree in Electronic Engineering from the Technion, Israel Institute of Technology and an Executive MBA from Tel-Aviv University. Mr. Nativ is a member of our Audit Committee.

In April 2003, David Rubner and Moshe Kahn and in December 2003 Yael Ilan resigned from our Board of Directors. Mr. Kahn was one of our two external directors required according to the Israeli Companies Law and a member of our Audit Committee.

There is no family relationship between any of the persons named above. Furthermore, there are no arrangements or understandings with any of the major shareholders, customers, suppliers or others, pursuant to which any person referred to above was selected as a director or member of senior management.

B. Compensation.

During the fiscal year ended December 31, 2003, the aggregate remuneration paid to all officers and directors of the Company as a group was approximately $70,000 which relates only to the period from January 1, 2003 until March 31, 2003. Effective as of April 1, 2003, all of the directors of the Company agreed to suspend their compensation until the Company either receives a settlement from an ongoing lawsuit which at that time was in mediation or receives proceeds from the sale/exit of StoreAge or Enargis or the raising of additional financial resources. Following settlement of this lawsuit, the directors of the Company did not take this compensation and agreed that this compensation will be paid only from receipt of proceeds from the sale/exit of our holdings in StoreAge or Enargis or the raising of additional financial resources. The amount of compensation due but unpaid to our officers and directors as of December 31, 2003 according to this arrangement is approximately $95,000. However, Mr. Hartman was paid during 2003 and still receives a fee of NIS 22,100 per month (approximately $4,850 at the exchange rate as of May 31, 2004) for services he performs as Chairman of the Board of StoreAge. This amount is funded by StoreAge. In addition, Mr. Hartman is entitled to compensation for services from Enargis which he has not drawn since its incorporation. As of December 31, 2003 the amount of unpaid compensation due to Mr. Hartman from Enargis was NIS 170,000 (approximately $37,300, at the exchange rate as of May 31, 2004). This compensation is separate from and in addition to the shareholder loans owed by Enargis to West End Technology Investments Ltd., which is owned and controlled by Mr. Hartman. As of May 31, 2004 the amount of these loans were $115,000. These loans are secured by charges on the assets of Enargis and are subject to repayment on demand.

No options were granted to officers or directors during the fiscal years ended December 31, 2001, 2002 and 2003. An aggregate of 456,550 options were granted to the Company’s directors during the fiscal year ended December 31, 2000. All of such options are exercisable for Ordinary Shares of the Company and have an exercise price of $3.625. With the exception of the options held by Robi Hartman, the options become exercisable in four equal annual installments from the date of grant and expire six years after the date of grant. Mr. Hartman holds a total of 356,550 options, all are currently fully exercisable and expire on November 30, 2006. For information on the Company’s stock option plan, see “Stock Option Plans” below and Note 7.b to the Company’s Consolidated Financial Statements.

Effective as of April 1, 1999 StoreAge granted to Mr. Hartman in his capacity as Chairman of the Board, acting Chief Financial Officer and Secretary of StoreAge to purchase 310,000 non-voting ordinary shares of StoreAge at an exercise price of $0.1 per share. These options vested over four years and are fully vested and currently constitute approximately 1.5 % of the fully-diluted shares of StoreAge.

Board Practices.

In August 1993 the Company’s articles of association were amended to provide, among other matters, for a classified board of directors. These provisions were retained with minor amendments, in the new articles of associations of the Company approved on November 19, 2000 (the “Articles of Association”). Dr. Ilan served as a director of the Company from November 1997 until her resignation in December 2003. Mr. Hartman has been a director of the Company since September 1998. Since Mr. Hartman is Chief Executive Officer of the Company, in accordance with the provisions of the Articles of Association, he shall serve as a director as long as he remains Chief Executive Officer. Mr. Jacobowitz has been a director of the Company since May 1995 and currently serves until the 2003 annual meeting and until his successor has been elected and qualified. Mr. Nativ has served as a director of the Company since November 2000 when he was elected as external director (as defined below) pursuant to the Israeli Companies Law. Under Israeli Companies Law, the initial term of an external director is three years and may be extended for an additional three years. As a result of various factors, including a very severe cash shortage in the latter part of 2003, we have not convened an annual general meeting for 2003 as is required by our articles of association and Israeli law. We intend to convene an annual general meeting in July, 2004.

Officers serve at the discretion of the board of directors, subject to the terms of any agreement between them and the Company.

There are no service contracts between the Company and any of its directors providing for benefits upon termination of employment.

External and Independent Directors

Under the new Israeli Companies Law, Israeli companies whose shares have been offered to the public in or outside of Israel are required to appoint two people to serve as external directors on the board of directors of a company. The Companies Law provides that a person may not be appointed as an external director if the person or the person’s relative, partner, employer or any entity controlled by that person has at the date of appointment, or has had at any time during the two years preceding that date, any affiliation with the company, any entity controlling the company or any entity controlled by the company or by this controlling entity. The term “affiliation” includes:

	•	an employment relationship;

	•	business or professional relationship maintained on a regular basis;


	•	control; or

	•	service as an officer.

No person can serve as an external director if the person’s position or other business creates, or may create, conflict of interests with the person’s responsibilities as an external director or if such position or other business may impair such director’s ability to serve as an external director. No person who is a director in one company can serve as an external director in another company, if at that time a director of the other company serves as an external director in the first company. The Companies Law further provides that when, at the time of appointment of an external director, all members of the board of directors of the company are of one gender, then the external director appointed shall be of the other gender. Since April 2003, we have not complied with these requirements due to the resignation of certain directors and our inability to attract additional directors . Since April 1, 2004 we do not maintain directors and officers insurance due to the cost involved. We can give no assurance that we shall be able to retain existing directors or attract new directors in order to comply with the applicable statutory requirements.

External directors are appointed by a majority vote at a shareholders’ meeting, provided that either: (1) the majority of shares voted at the meeting, including at least one third of the shares of non-controlling shareholders voted at the meeting, vote in favor of appointment of the director or (2) the total number of shares of non-controlling shareholders voted against the election of the director does not exceed one percent of the aggregate voting rights in the company. The initial term of an external director will be three years and may be extended for an additional three-year period. Each committee of a company’s board of directors will be required to include at least one external director and all external directors must be members of the company’s audit committee.

In addition, we are obligated under the Companies Law to establish an audit committee, at least a majority of whose members are independent of management. The audit committee should adopt a formal written audit committee charter to be reviewed annually.

An external director is entitled to consideration and to the refund of expenses, only as provided in regulations adopted under the Companies Law and is otherwise prohibited from receiving any other consideration, directly or indirectly, in connection with service provided as an external director. Nevertheless, the grant of an exemption from liability for breach of fiduciary duty or duty of care, an undertaking to indemnify, indemnification or insurance under the provisions of the Companies Law shall not be deemed as consideration. Under the Companies Law, an external director cannot be dismissed from the office unless:

	•	the board of directors determines that the external director no longer meets the requirements for holding such office, as set forth in the Companies Law or that the director is in breach of his or her fiduciary duties to the company and the shareholders of the company vote (by the same majority required for the appointment) to remove the external director after the external director has been given the opportunity to present his or her position;

	•	an Israeli court determines, upon a request of a director or a shareholder, that the director no longer meets the requirements for holding such office as set forth in the Companies Law or that the director is in breach of his or her fiduciary duties to the company; or


	•	the court determines, upon a request of the company or a director, shareholder or creditor of the company, that the external director is unable to fulfill his or her duty or has been convicted of certain crimes as specified in the Companies Law.

Audit Committee

The Israeli Companies Law requires public companies to 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 directors, including all of the external directors. The chairman of the board of directors, any director employed by or otherwise providing services to the company, and a controlling shareholder or 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. Since the resignation in April 2003 of Mr. Kahn who was one of our two external directors, we do not have a legally constituted audit committee under Israeli law. The other members of our audit committee are Messrs. Nativ and Jacobowitz. Since April 2003 due to the resignation of certain directors and our inability to attract additional directors, we have only one external director and, consequently, do not have a duly constituted audit committee under Israeli law. Since April 1, 2004 we do not maintain directors and officers insurance due to the cost involved. We can give no assurance that we shall be able to retain existing directors or attract new directors in order to comply with the applicable statutory requirements.

The audit committee provides assistance to the board in fulfilling its legal and fiduciary obligations with respect to matters involving the accounting, auditing, financial reporting and internal control functions of the Company. In carrying out these duties, the audit committee meets at least once in each fiscal quarter with management at which time, among other things, it reviews, and either approves or disapproves, the financial statements of the Company for the immediately preceding fiscal quarter and conveys its conclusions in this regard to the board. The audit committee also monitors generally the services provided by the Company’s external auditors to ensure their independence, and reviews, and either approves or disapproves, all audit and non-audit services provided by them. The Company’s external and internal auditors also report regularly to the audit committee at its meetings, and the audit committee discusses with the Company’s external auditors the quality, not just the acceptability, of the accounting principles, the reasonableness of significant judgments and the clarity of disclosures in the Company’s financial statements, as and when it deems it appropriate to do so.

Under the provisions of the Sarbanes-Oxley Act of 2002, the audit committee will be responsible for the appointment, compensation, retention and oversight of the work of the Company’s external auditors. However, under Israeli law, the appointment of external auditors and their compensation require the approval of the shareholders of the Company. Pursuant to Israeli law, the shareholders may delegate the authority to determine the compensation of the external auditors to the board of directors. The compensation of the external auditors will be required to be approved by the audit committee and recommended to the shareholders or, if so authorized by the shareholders, the board and ratified by the shareholders or the board, as the case may be.

Internal Auditor

Pursuant to the Israeli Companies Law, the board of directors must appoint an internal auditor, nominated by the audit committee. The role of the internal auditor is to examine, among other matters, whether the company’s actions comply with the law and orderly business procedure. Under the Israeli Companies Law, the internal auditor may be an employee of the company but not an office holder, or an affiliate, or a relative of an office holder or affiliate, and he or she may not be the company’s independent accountant or its representative. In 2002, we appointed an internal auditor. The last report provided by our internal auditor was for the first fiscal quarter of 2003 and the internal auditor has not been active since then.

Compensation Committee

The Israeli Companies Law does not require public companies to appoint a compensation committee. The Company, however, has selected a compensation committee which makes recommendations to the board with respect to all director and officer compensation issues including the grant of stock options. Our compensation committee consists of Messrs. Nativ and Jacobowitz.

C. Employees.

As of December 31, 2003 the Company employed 3 people, all in general management and administration; StoreAge employed 62 persons: 31 in engineering and research and development, 13 in sales and marketing , 7 in technical support and 11 in general management and administration; Enargis employed 8 persons, 5 in research and development, 1 in technical support and 2 in general management and administration. The Company has never experienced a work stoppage, and the Company considers its relations with its employees to be good. The Company pays competitive salaries and provides competitive benefits to its employees.

Certain provisions of the collective bargaining agreements between the Histadrut (the General Federation of Labor in Israel) and the Coordinating Bureau of Economic Organizations (including the Industrialists’ Association) (the “CBEO”) are applicable to the Company’s Israeli employees by order of the Israeli Ministry of Labor. These provisions principally concern the length of the workday, minimum daily wages for professional workers, contributions to a pension fund, insurance for work related accidents, procedures for dismissing employees, determination of severance pay and other conditions of employment. The Company generally provides its Israeli employees with benefits and conditions beyond the required minimums.

An important contractual provision applicable to all employers in Israel is the linkage of wages to increases in the CPI, although the extent of the linkage has been limited in recent years. The specific formula of such linkage varies according to agreements reached between the Government of Israel, the Histadrut and the CBEO.

In addition, Israeli law generally requires severance pay (generally one month’s salary for each year of employment) upon the retirement or death of an employee or termination of employment without due cause. 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. Such payments amount to approximately 10.38% of wages (up to a maximum amount), with the employee contributing approximately 5.93% and the employer contributing the remainder.

D. Share Ownership.

The following chart sets forth director and senior management share ownership in the Company as of April 30, 2004. Each shareholder listed below enjoys the same voting rights with respect to each share.

Name	Title of Class	Number of Shares Beneficially Owned⁽¹⁾			Percentage of Shares Beneficially Owned (%)⁽²⁾			Options⁽³⁾

Robi Hartman	Ordinary Shares		1,727,694	⁽⁴⁾		14.48	%		356,550

Aharon Jacobowitz	Ordinary Shares		37,500	(5)		*			50,000

Jonathan Nativ	Ordinary Shares		37,500	(5)		*			50,000


*	Owns less than one percent of the Ordinary Shares outstanding.

(1)	Beneficial ownership by a person assumes the exercise of all options and warrants held by such person that are currently exercisable or are exercisable within 60 days of such date.

(2)	Percentage ownership is based on 11,572,398 shares outstanding as of May 31, 2004.

(3)	All of the options are exercisable for Ordinary Shares of the Company and have an exercise price of $3.625. With the exception of the options held by Robi Hartman, the options become exercisable in four equal annual installments from the date of grant and expire six years after the date of grant. Mr. Hartman’s 356,550 options are fully exercisable and expire on November 30, 2006. Messers. Jacobowitz’s and Nativ’s remaining 12,500 options will become exercisable on November 30, 2004.

(4)	Includes 365,550 shares subject to options exercisable within 60 days .

(5)	Consists of 37,500 shares subject to options exercisable within 60 days.

Stock Option Plans

In August 1993, the existing employee share incentive plan (the “Plan”) was approved by the board of directors and later adopted by the Company’s shareholders. The Plan permits the grant of options to purchase Ordinary Shares to officers, directors and key employees of, and consultants to, the Company or any subsidiary of the Company. The Plan presently permits the grant of options to purchase up to an aggregate of 1,192,929 Ordinary Shares.

The Plan is administered by the board of directors or by a committee appointed by the board of directors, which designates the optionees, exercise prices and amounts and dates of grant. The exercise price of options granted under the Plan is the fair market value of the underlying shares on the date of grant, or a lesser percentage of fair market value as is determined by the committee or the board of directors, but in no event less than 85% of the market price of the shares on the date of grant. Options are non assignable except by the laws of descent and generally vest and are exercisable in three equal annual installments. The options expire 6-10 years subsequent to the date of grant.

As of December 31, 2003, options to purchase up to 781,762 Ordinary Shares were outstanding, exercisable at prices ranging from $3.63 to $28.89 per share, with expiration dates ranging from May 2004 to January 2008, of which options to purchase up to 456,550 Ordinary Shares were held by all officers and directors of the Company as a group. For additional information regarding the Company’s stock option plan, see Note 7.b. to the Company’s Consolidated Financial Statements.

Item 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A. Major Shareholders.

During the period from August 14, 2002 to January 23, 2003, Mr. Hartman purchased an aggregate of 466,280 of the Company’s Ordinary Shares and as a result of prior acquisitions of shares and such purchases beneficially owns 14.48% of the Company’s outstanding Ordinary Shares. As reported on its Schedule 13G filed with the Securities & Exchange Commission, dated January 14, 2002, CDC Holdings Ltd. acquired 1,258,255 Ordinary Shares upon its conversion of convertible secured debentures in connection with that certain amendment agreement dated as of December 5, 2001 by and between the Company and the holders of its convertible secured debentures and warrants.

The following table sets forth, as of April 30, 2004, the number of Ordinary Shares of the Company owned by all persons known to the Company to beneficially own 5% or more of the Company’s Ordinary Shares. The Company’s major shareholders do not have different voting rights.

Name and Address	Number of Ordinary Shares Beneficially Owned⁽¹⁾			Percentage of Ordinary Shares Beneficially Owned⁽²⁾

CDC Holdings Ltd		1,258,225	⁽³⁾	10.87	%

Robi Hartman		1,727,694	⁽⁴⁾	14.48	%

All directors and officers as a group		1,802,694	⁽⁵⁾	15.02	%

(1)	Beneficial ownership assumes the exercise of all options and warrants held by such person or persons that are currently exercisable or are exercisable within 60 days of such date.

(2)	Percentage ownership is based on 11,572,398 shares outstanding as of April 30, 2004.

(3)	As reported on Schedule 13G filed with the Securities & Exchange Commission, dated January 14, 2002.

(4)	Includes 1,371,144 Ordinary Shares as reported on Amendment No. 12 to Schedule 13G filed with the Securities & Exchange Commission, dated January 30, 2003 and 356,550 options to purchase Ordinary Shares. Mr. Hartman is Chief Executive Officer and Chairman of the Company.

(5)	Includes 431,550 shares subject to options exercisable within 60 days..

As of April 24, 2004, approximately 80% of the outstanding Ordinary Shares of the Company were held of record by approximately 78 holders registered on the books of the Company’s United States transfer agent with addresses in the United States. The Company believes that there are more than 500 beneficial owners of its Ordinary Shares in the United States and that a majority of its Ordinary Shares are beneficially owned by non-United States persons. To the extent known to the Company, the Company is not directly or indirectly owned or controlled by another corporation, by any foreign government or by any other natural or legal person.

There are currently no arrangements known to the Company that may result in a change in control of the Company.

B. Related Party Transactions.

In connection with the StoreAge’s private placement, in January 2001, the Company, StoreAge and certain investors entered into a shareholders’ rights agreement (the “Rights Agreement”). Under the Rights Agreement, in addition to other provisions, each party has the right of first refusal to purchase any shares of StoreAge offered for sale by the Company and the other investors.

In February 2001, a portion of the Company’s office space located in Ramat Gan, Israel was leased from a company that is owned by Robi Hartman, the Company’s Chief Executive Officer and Chairman. The space was leased at 70% of the then generally prevailing market rate for lease space in the area, as approved by the Company’s audit committee based upon an independent appraisal report. As of April 1, 2003 (see below), this lease was assumed by Enargis which now sublets 35% of the premises to the Company.

Several of the StoreAge’s employees perform general and administrative services for the Company and the Company is charged on a percentage of cost basis for such work. Additionally, the Company’s research and development team was engaged from 2000 through 2002 in developing Internet Small Computer Systems Interface (“iSCSI”) applications for StoreAge. During 2000, the Company signed an agreement with StoreAge according to which the Company would provide StoreAge iSCSI capabilities to StoreAge’s products in consideration of $200,000 according to the milestones defined in the agreement. During 2001, the companies agreed to expand this agreement to provide that the Company may receive an additional $196,000 in consideration for its services. As of December 31, 2002, the Company had recorded accumulated research and development services revenues of $145,000 related to these services. This agreement expired, in accordance with its terms, in October 2002.

On March 31, 2003, the Company sold its iSCSI operations and related assets and liabilities on an “as-is” basis to Enargis Storage Solutions Ltd (“Enargis”), which is owned and controlled by Robi Hartman, our Chairman and Chief Executive Officer, and Danny Shavit, our previous Chief Technology Officer. Pursuant to the agreement, the Company received a 25% ownership interest in Enargis and the Company is entitled to commissions of 3% of certain revenues derived from outstanding customers, existing at that time, of the Company prior to the completion of the transaction with Enargis, see Note 2.k to the Company’s Consolidated Financial Statements. In addition, as of April 1, 2003, Enargis assumed all the obligations under the Company’s current lease in Israel and sublicensed use of part of the premises (35%) to the Company. The Company also has pre-emptive rights to participate in future financing of Enargis, co-sale rights on the sale of certain shares by other 5% shareholders of Enargis and certain information and access rights with respect to Enargis. This transaction was approved by our audit committee and Board of Directors in accordance with Israeli law. In approving the transaction, the Board and audit committee considered, amongst other things, a fairness opinion received from an unaffiliated expert.

C. Interests of Experts and Counsel.

Not applicable.

Item 8. FINANCIAL INFORMATION

A. Consolidated Statements and Other Financial Information.

See pages F-1 – F-23 of the Company’s financial statements, pages 1 – 22 of StoreAge’s financial statements and pages 1 – 13 of Enargis’s financial statements following Item 19.

Legal Proceedings

The Company is not a party to any litigation that would, individually or in the aggregate, have a material adverse effect on the Company or its business, and is not aware that any such litigation is threatened.

Dividends

The Company has not declared or paid dividends on its Ordinary Shares since 1989, and does not intend to declare or pay any dividends to their shareholders in the foreseeable future.

B. Significant Changes.

The board of directors of the Company has proposed to the shareholders to approve the voluntary liquidation of the Company. See Item 3 – Key Information, D. Risk Factors “Our board of directors has proposed to shareholders to approve the voluntarily liquidation of the Company” and Item 4 – Information on the Company, A. Proposal for Voluntary Liquidation. Except for this, there have been no significant changes since December 31, 2003, the date of the annual financial statements in this annual report.

Item 9. THE OFFER AND THE LISTING

The Ordinary Shares of the Company have been traded in the over-the-counter market in the United States since the Company’s initial public offering on November 8, 1984. The Ordinary Shares originally traded under the symbol IISLF and now trade under the symbol IISL. From January 22, 1985 to March 17, 1999, the Ordinary Shares traded on the Nasdaq National Market (“Nasdaq”). From March 18, 1999 until January 22, 2003, the Ordinary Shares traded on the Nasdaq SmallCap Market. Since January 23, 2003, the Company’s Ordinary Shares have traded on the OTC Bulletin Board.

The following table sets forth, for the periods indicated, the annual high and low closing sales price quotes of the Ordinary Shares as reported by Nasdaq, or by the OTC Bulletin Board since January 23, 2003, for the five most recent full financial years and the quarterly high and low closing sales price quotes for the two most recent full financial years. The table also sets forth the high and low closing sales price quotes of the Ordinary Shares as reported by the OTC Bulletin Board for the most recent six months.

	High		Low


Year ended December 31, 1999	$	7.00	$	0.34

Year ended December 31, 2000	$	9.56	$	1.56

Year ended December 31, 2001	$	4.25	$	0.75

Year ended December 31, 2002	$	1.16	$	0.36

Year ended December 31, 2003	$	0.92	$	0.31

2002
First Quarter	$	1.39	$	1.08
Second Quarter		1.10		0.62
Third Quarter		0.88		0.41
Fourth Quarter		0.70		0.30

2003
First Quarter	$	0.61	$	0.38
Second Quarter		0.60		0.31
Third Quarter		0.92		0.35
Fourth Quarter		0.57		0.39

Most Recent Six Months

December 2003		0.51		0.39
January 2004		0.73		0.39
February 2004		0.60		0.45
March 2004		0.59		0.40
April 2004		0.58		0.35

May 2004		0.45		0.33

The foregoing prices reflect inter-dealer quotations without retail mark-ups, mark-downs or commissions and may not represent actual transactions.

Item 10. ADDITIONAL INFORMATION

A. Share Capital.

Not applicable.

B. Memorandum and Articles of Association.

Objects and Purposes in the Company’s Articles of Association

The Company’s objects and purposes are specified in its Memorandum of Association filed as Exhibit 3.2 to Registration Statement No. 33-62862 dated August 10, 1993 (the “Memorandum”).

Provisions Regarding Directors

Pursuant to article 54(b) of our Articles of Association, a transaction entered into by the Company in which a director of the Company has a personal interest, directly or indirectly, will be valid in respect of the Company and the given director only if approved by the Company’s board of directors and, if such transactions are “irregular transactions” as defined in the Israeli Companies Law, only if approved in accordance with the requirements of the Israeli Companies Law.

An “irregular transaction” pursuant to the Israeli Companies Law is defined as a transaction which is not in the ordinary course of business, a transaction which is not under ordinary market conditions or any transaction which might substantially affect the profitability of the Company, its assets and liabilities.

The Israeli Companies Law provides that a director who has personal interest in a given transaction of the Company, brought to the approval of the board of directors, shall not be present and vote at that meeting. Article 55 of the Company’s Articles of Association, provides that a director who has a personal interest in a matter which is brought for discussion before the board of directors may participate in said discussion, provided that he shall neither vote in nor attend discussions concerning the approval of the activities or the arrangements. If said director did vote or attend as aforesaid, the approval given to the aforesaid activity or arrangements shall be invalid.

Pursuant to article 72 of the Company’s Articles of Association, at any meeting of the board of directors at which a quorum is present, the board will have the authority to exercise all or part of the authorities, power of attorney and discretion invested at such time in the directors or regularly exercised by them. With respect to legal quorum at our board meetings, the Israeli Companies Law provides that, unless determined otherwise by the Company, a legal quorum at the board meetings shall consist of the majority of the board members. We have not decided otherwise and therefore, the legal quorum at our board meeting will consist of the majority of the board members.

Any transaction concerning compensation to a director requires the approval by the board of directors, the audit committee and the shareholders of the Company.

The board of directors may from time to time, in its discretion, cause the Company to borrow or secure the payment of any sum or sums of money for the purpose of the Company. Additionally, the Company may secure or provide for the repayment of such sum or sums in such manner, at such times and upon such terms and conditions in all respects as it sees fit and in particular, by the issuance of bonds, perpetual or redeemable debentures, debenture stock, or any mortgages, charges or other securities on the undertaking, or the whole or any part of the property of the Company, both present and future, including units uncalled or called but unpaid capital for the time being.

There is no mandatory retirement age for the directors under our Articles of Association or the Companies Law.

There is no requirement concerning the number of shares one individual must hold in order to qualify him or her as a director under our Articles of Association or the Israeli Companies law.

Dividends

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. Unless not otherwise specified in the conditions of issuance of the shares, all dividends with respect to shares which were not fully paid up within a certain period, for which dividends were paid, shall be paid proportionally to the amounts paid or credited as paid on the nominal value of the shares during any portion of the above-mentioned period.

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.

The 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.

A transfer of shares shall not pass the right to any dividend declared thereon after such transfer and before the registration of the transfer.

There is no time limit after which dividend entitlement lapses according to our Articles of Association or the Companies Law.

The board of directors may determine that, a dividend may be paid, wholly or partly, by the distribution of specific assets of the Company or by distribution of paid up shares, debentures or debenture stock or any other securities of the Company or of any other companies or in any one or more of such ways in the manner and to the extent permitted by the Companies Law.

Terms of Directors

Pursuant to article 50 of our Articles of Association, except for external directors (as defined in the Companies Law) and the Chief Executive Officer of the Company who will automatically be a director of the Company (and his term of office as a director shall be vacated, ipso facto, when he ceases to serve as Chief Executive Officer of the Company), all directors shall be classified, with respect to the time for which they severally hold office, into three classes, as nearly equal in number as possible, one class that currently holds for a term that expires at the 2003 annual meeting of the Company, another class that holds office for a term that expires at the 2004 annual meeting of the Company, and another class that holds office for a term that expires at the 2005 annual meeting of the Company, with the members of each class to hold office until their successors have been duly elected and qualified. The class of directors whose term expires at any annual meeting shall be elected to hold office for a term expiring at the annual meeting of the Company held in the third year following the year of their election and until their successors have been duly elected and qualified. Except for article 50 of the Company’s Articles of Association (described above) which may be amended only by the affirmative vote of 75% of our shareholders present (in person or by proxy) and voting on such resolution at a general meeting, all other articles of our Articles of Association may be amended by a majority vote of shareholders present and voting at a meeting of shareholders of the Company.

Votes of Shareholders

Our shareholders have one vote for each share held on all matters submitted to a vote of shareholders. Except as otherwise provided in our Articles of Association, 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. In the case of an equality of votes, either on a show of hands or a poll, the chairman of the meeting shall not be entitled to a further or casting vote.

At all general meetings, a resolution put to a vote at the meeting shall be decided on a show of hands unless, before or upon the declaration of the result of the show of hands, a poll in writing be demanded by the chairman (being a person entitled to vote), or by at least two shareholders present, in person or by proxy, holding at least 5% of the issued share capital of the Company and, unless a poll be so demanded, a declaration by the chairman of the meeting that a resolution has been carried, or has been carried unanimously or by a particular vote, or lost, or not carried by a particular vote, shall be conclusive, and an entry to that effect in the minute book of the Company shall be conclusive evidence thereof, without proof of the number or proportion of the votes recorded in favor of or against such resolution.

If a poll be demanded in manner aforesaid, it shall be taken forthwith, and the result of the poll shall be deemed to be the resolution of the meeting at which the poll was demanded. The demand of a poll shall not prevent the continuance of a meeting for the transaction of any business other than the question on which a poll has been demanded.

Any shareholder which is not a natural person may, by resolution of its directors or other governing body, authorize such person as it thinks fit to act as its representative at a general meeting, and the person so authorized to the satisfaction of the Company shall be entitled to exercise the same powers on behalf of such company, which he represents as the company could exercise if it were an individual shareholder.

Subject to any rights or restrictions for the time being attached to any class or classes of shares, every shareholder shall have one vote for each share of which he is the holder, whether on a show of hands or on a poll. Our Articles of Association do not permit cumulative voting and it is not mandated by Israeli law. Votes may be given either personally or by proxy. A proxy need not be a shareholder of the Company. If any shareholder be a lunatic, idiot, or non compos mentis, he may vote by his committee, receiver, curator bonis or other legal curator, and such last mentioned persons may give their votes either personally or by proxy. If two or more persons are jointly entitled to a share then, in voting upon any question, the vote of the senior person who tenders a vote, whether in person or by proxy, shall be accepted to the exclusion of the votes of the other registered holders of the share and, for this purpose seniority shall be determined by the order in which the names stand in the shareholder register.

The instrument appointing a proxy shall be in writing in the usual common form, or such form as may be approved by the board of directors, and shall be signed by the appointor or by his attorney duly authorized in writing or, if the appointor is a corporation, the corporation shall vote by its representative, appointed by an instrument duly signed by the corporation. The instrument appointing a proxy shall be deemed to include authorization to demand a poll or to vote on a poll on behalf of the appointor.

A vote given in accordance with the terms of an instrument of proxy shall be valid notwithstanding the previous death or insanity of the principal, or revocation of the proxy, or transfer of the share in respect of which the vote is given, unless an intimation in writing of the death, revocation or transfer shall have been received at the office before the commencement of the meeting or adjourned meetings at which the proxy is used.

The instrument appointing a proxy shall be deposited at the registered office of the Company or at such other place or places, whether in Israel or elsewhere, as the board of directors may from time to time, either generally or in a particular case or class of cases prescribe, at least forty eight (48) hours before the time appointed for holding the meeting or adjourned meeting at which the person named in such instrument proposes to vote. Otherwise, the person so named shall not be entitled to vote in respect thereof, but no instrument appointing a proxy shall be valid after the expiration of twelve months from the date of its execution.

Subject to the provisions of the Companies Law, a resolution in writing (approved by letter, telex, facsimile or otherwise) by all the shareholders, in person or by proxy, for the time being entitled to vote at a general meeting of the Company, shall be as valid and as effectual as a resolution adopted by a general meeting duly convened, held and constituted for the purpose of passing such resolution.

A shareholder will be entitled to vote at the meetings of the Company by several proxies appointed by him, provided that each proxy shall be appointed with respect to different shares held by the appointing shareholder. Every proxy so appointed on behalf of the same shareholder shall be entitled to vote as he sees fit.

Further Rights and Preferences of the Ordinary Shares

In the event of sale or the undertaking of the Company, the board or the liquidator on a winding up, as the case may be, subject to the authorization by a majority vote at a meeting of shareholders, may distribute to our shareholders all assets remaining after payment of the Company’s liabilities.

Our Articles of Association allow, subject to the Israeli Companies Law, the issue of redeemable shares and to redeem the same according to terms and conditions determined by the Company. Our Articles of Association do not include provisions related to sinking funds.

According to our Articles of Association no person shall be entitled to vote at any general meeting (or be counted as a part of the quorum thereof) unless all calls then payable by him in respect of his shares in the Company shall have been paid. The Israeli Companies Law provides that a company is entitled to determine within its articles a provision allowing the board to place call on shares, in event the consideration for such shares, in full or in part, have not been paid on time and in accordance with the agreeable terms set out in the given agreement or the articles of association of the company.

According to our Articles of Association, there are no discriminating provisions against any existing or prospective holders of shares of the Company as a result of a shareholder holding a substantial number of shares.

Modification of Class Rights

If, at any time, the share capital is divided into different classes of shares, the rights attached to any class (unless otherwise provided by the terms of issuance of the shares of that class) may be varied with the consent in writing of the holders of all the issued shares of that class, or 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. The provisions of our Articles of Association relating to general meetings shall apply, mutatis mutandis, to every such separate general meeting. Any holder of shares of the class present in person or by proxy may demand a secret poll.

Unless otherwise provided by the conditions of issuance, the enlargement of an existing class of shares, or the issuance of additional shares thereof, shall not be deemed to modify or abrogate the rights attached to the previously issued shares of such class or of any other class. These conditions provide for the minimum shareholder approvals permitted by the Israeli Companies Law.

General Meetings

General meetings 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 general meeting, and at such time and place as may be determined by the board of directors.

The board of directors may, whenever it deems necessary, and shall upon such requisition in writing as is provided by Section 63(b) of the Companies Law, convene a general meeting. Any such request must state the purposes for which the meeting is to be called, be signed by the requesting shareholders, and must be deposited at the registered office of the Company. Such request may consist of several documents in like form, each signed by one or more requesting shareholder.

Unless a longer period for notice is prescribed by the Companies Law, at least ten (10) 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 Company’s Articles of Association, entitled to receive notices from the Company. Notices shall be given by mail or by personal delivery to every registered shareholder of the Company, to his address as described in the shareholders register of the Company or such other address as designated by him in writing for this purpose. Provided that the accidental omission to give such notice to, or the non receipt of such notice by, any such shareholder shall not invalidate any resolution passed or proceeding held at any such meeting and, with the consent of all the shareholders for the time being entitled to receive notice of meetings, a meeting may be convened upon a shorter notice or without notice, and generally in such manner as such shareholders may approve. Such consent may be given at the meeting or retrospectively after the meeting. If the shareholder did not provide the Company any address for the delivery of notices, the shareholder shall be deemed to have waived his right to receive notices.

Only shareholders of record as reflected on the Company’s share register at the close of business on the date fixed by the board of directors as the record date determining the then shareholders who will be entitled to vote, shall be entitled to notice of, and to vote, in person or by proxy, at a general meeting and any postponement or adjournment thereof.

Quorum at General Meetings

No business shall be transacted at any general meeting unless a quorum is present when the meeting proceeds to business. The quorum at any Meeting shall be two shareholders present in person or by proxy, holding or representing at least twenty five percent (25%) of the total voting rights in the Company. A company being a shareholder shall be deemed to be personally present for the purpose of the Company’s Articles of Association if represented by its representative duly authorized in accordance with article 42 of the Company’s Articles of Association.

If, within half an hour from the time appointed for the holding of a general meeting, a quorum is not present, the meeting shall stand adjourned to the same day in the next week at the same time and place, or any time and hour as the board of directors shall designate and state in a notice to the shareholders entitled to vote at the original meeting, and if, at such adjourned 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 shall 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.

Restrictions on Shareholders Rights to Own Securities

The Memorandum and Articles of Association of the Company do not restrict in any way the ownership of Ordinary Shares by residents or nonresidents, except with respect to subjects of countries which are in a state of war with Israel, and neither the Memorandum and Articles of Association nor Israeli law restricts the voting rights of residents or nonresidents.

Potential Issues that Could Delay a Merger

The classification of our board of directors could delay or impede the removal of incumbent directors and could therefore complicate a merger, tender offer or proxy contest involving us, even if such events would be beneficial to the interests of our shareholders, or could discourage a third party from attempting to acquire control of the Company.

A merger of the Company requires the approval of the board of directors and the general meeting of shareholders, in accordance with the provisions of the Israeli Companies Law. See also “Anti-Takeover Provisions; Merger and Acquisitions under Israeli Law”.

Requirement of Disclosure of Shareholder Ownership

There are no provisions of our Memorandum or Articles of Association governing the ownership threshold above which shareholder ownership must be disclosed.

Approval of Related Party Transactions Under Israeli Law

The Companies Law codifies the fiduciary duties that “office holders,” including directors and executive officers, owe to a company. An office holder’s fiduciary duties consist of a duty of care and a duty of loyalty. The duty of care requires an office holder to act at a level of care that a reasonable office holder in the same position would employ under the same circumstances. The duty of loyalty includes avoiding any conflict of interest between the office holder’s position in the company and his personal affairs, avoiding any competition with the company, avoiding exploiting any business opportunity of the company in order to receive personal gain for the office holder or others, and disclosing to the company any information or documents relating to the company’s affairs which the office holder has received due to his position as an office holder. Each person listed as a director or executive officer in the table under “Directors, Senior Management and Employees—Directors and Senior Management” above is an office holder. Under the Companies Law, all arrangements as to compensation of office holders who are not directors require approval of our board of directors, and the compensation of office holders who are directors must be approved by our audit committee, board of directors and shareholders.

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 us. In addition, if the transaction is an extraordinary transaction, that is, a transaction other than in the ordinary course of business, other than on market terms, or likely to have a material impact on the company’s profitability, assets or liabilities, the office holder must also disclose any personal interest held by the office holder’s spouse, siblings, parents, grandparents, descendants, spouse’s descendants and the spouses of any of the foregoing, or by any corporation in which the office holder or a relative is a 5% or greater shareholder, director or general manager or in which he or she has the right to appoint at least one director or the general manager. Some transactions, actions and arrangements involving an office holder (or a third party in which an office holder has an interest) must be approved by the board of directors or as otherwise provided for in a company’s articles of association, as not being adverse to the company’s interest. In some cases, such a transaction must be approved by the audit committee and by the board of directors itself (with further shareholder approval required in the case of extraordinary transactions). An office holder who has a personal interest in a matter, which is considered at a meeting of the board of directors or the audit committee, may not be present during the board of directors or audit committee discussions and may not vote on this matter, unless the majority of the members of the board or the audit committee have a personal interest, as the case may be.

The Companies Law also provides that some transactions between a public company and a controlling shareholder, or transactions in which a controlling shareholder of the company has a personal interest but which are between a public company and another entity, require the approval of the board of directors and of the shareholders.

Once the officer or controlling shareholder complies with these disclosure requirements, the company may approve the transaction in accordance with the provisions of the Companies Law and its articles of association. Generally, the approval of the majority of the disinterested members of the audit committee and the board of directors is required. If audit committee approval is required for a transaction with an interested party, an officer or a controlling shareholder, such approval may not be given unless, at the time the approval was granted two members of the audit committee were external directors and at least one of them was present at the meeting at which the audit committee decided to grant the approval. Shareholder approval may also be required if the transaction is an exceptional transaction. An exceptional transaction is a transaction other than in the ordinary course of business, otherwise than on market terms or that is likely to have a material impact on the company’s profitability, assets or liabilities. In such event, the principal terms of such transaction must be disclosed in a notice to the shareholders which will include all substantive documents relating to the transaction.

Moreover, an extraordinary transaction with a controlling shareholder or the terms of compensation of a controlling shareholder must be approved by the audit committee, the board of directors and shareholders. The shareholder approval for an extraordinary transaction must include at least one-third of the shareholders who have no personal interest in the transaction and are present at the meeting. The transaction can be approved by shareholders without this one-third approval, if the total shareholdings of those shareholders who have no personal interest and voted against the transaction do not represent more than one percent of the voting rights in the company.

If the transaction is with an officer or with a third party in which the officer or the controlling shareholder has a personal interest, the approval must confirm that the transaction is not adverse to the company’s interest. Shareholders must also approve all compensation paid to directors in whatever capacity, company’s undertaking to indemnify a director or indemnification under a permit to indemnify and any transaction in which a majority of the board members have a personal interest. An officer with a personal interest in any matter may not be present at any committee or board of directors meeting where such matter is being approved, and may not vote thereon, unless the majority of the members of the committee or of the board of directors have a personal interest in such approval.

However, under the Companies Regulations (Relief From Related Party Transactions), 5760-2000, promulgated under the Companies Law and amended in January 2002, certain transactions between a company and its controlling shareholder(s) do not require shareholder approval. In addition, pursuant to the recent amendment to these regulations directors’ compensation and employment arrangements do not require the approval of the shareholders if both the audit committee and the board of directors approve that such arrangements are for the benefit of the company.

If the director or the office holder is a controlling shareholder of the company then the employment and compensation arrangement of such director or office holder does not require the approval of the shareholders if it meets certain criteria.

The above relief shall not apply if one or more shareholders, holding at least 1% of the issued and outstanding share capital of the company or of the company’s voting rights objects to the grant of such relief, providing that such objection is submitted to the company in writing not later than seven (7) days from the date of the filing of a report regarding the adoption of such resolution by the company pursuant to the requirements of the Israeli Securities Law. If such objection is duly and timely submitted then the compensation arrangement of the directors will require shareholders’ approval as detailed above.

Indemnification of Directors and Officers

The Companies Law provides that an Israeli company cannot exculpate an office holder from liability with respect to a breach of his duty of loyalty, but may exculpate in advance an office holder from his liability to the company, in whole or in part, with respect to a breach of his duty of care. Our articles of association provide that, subject to any restrictions imposed by corporate law, we may enter into a contract for the insurance of the liability of any of our office holders with respect to:

	•	a breach of his duty of care to us or to another person;

	•	breach of his duty of loyalty to us, provided that the office holder acted in good faith and had reasonable cause to assume that his act would not prejudice our interests; or

	•	a financial liability imposed upon him in favor of another person in respect of an act performed by him in his capacity as an office holder.

In addition, we 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 we institute against him or instituted on our behalf or by another person, or in a criminal charge from which he was acquitted, all in respect of an act performed in his capacity as an office holder.

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 certain improper actions.

Pursuant to the Companies Law, indemnification of, and procurement of insurance coverage for, our office holders must be approved by our audit committee and our board of directors and, in specified circumstances, by our shareholders.

We have undertaken to indemnify our office holders to the fullest extent permitted by law. Since April 1, 2004, we do not maintain directors and officers liability insurance due to the costs involved.

Anti-Takeover Provisions; Mergers and Acquisitions under Israeli Law

Pursuant to the Companies Law, if following any acquisition of shares of a public company or of a class of shares of a public company the acquiror will hold 90% or more of the company’s shares or 90% of any class of the company’s shares, respectively, then the acquiror must make a tender offer for all of the remaining shares or the particular class of shares of the company. In the event that 5% or more of the shareholders have not responded favorably to a tender offer, the offeror may not purchase more than 90% of that class of shares. Furthermore, the Companies Law provides that as long as a shareholder in a public company holds more than 90% of the company’s shares or of a class of shares, such shareholder shall be precluded from purchasing any additional shares of that type.

The Companies Law further provides that if following the tender offer such acquiring shareholder holds more than 95% of the outstanding shares of any class, the holders of all the remaining shares will be obligated to transfer such shares to the acquiror at the tender offer price. This entails the possibility of additional delay and the imposition of further approval requirements at the court’s discretion. The Companies Law requires that each company that is party to a merger approve the transaction by a vote of the board of directors and by a vote of the majority of its outstanding shares, generally excluding shares voted by the other party to the merger or any person holding at least 25% of the other party to the merger, at a shareholders’ meeting called for this purpose. In addition, in certain cases court approval of a merger may be required. Upon the request of a creditor to either party to the proposed merger, the court may delay or prevent the merger if it concludes that there exists a reasonable concern that as a result of the merger, the surviving company will be unable to satisfy the obligations of any of the parties to the merger. In addition, a merger may not be completed unless at least 70 days have passed from the time that a proposal for approval of the merger has been filed with the Israeli Registrar of Companies and certain notification and information have been provided to debtors.

Notwithstanding the approval requirements set forth in the Companies Law, companies, such as ours, which have been incorporated prior to the Companies Law coming into effect, must specifically amend their articles of association to provide for the shareholder voting requirements contained in the Companies Law.

The Companies Law also provides that an open market acquisition of shares in a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would become a holder of 25% of the voting rights in the company. This rule does not apply if there already is another holder of 25% of the voting rights in the company. Similarly, the Companies Law provides that an open market acquisition of shares in a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would become the holder of 45% of the voting rights in the company. This rule does not apply if another party already holds more than 50% of the voting rights in the company. Regulations promulgated under the Companies Law provide that these tender offer requirements do not apply to companies whose shares are listed for trading on a stock exchange outside of Israel only if, according to the laws in the country in which its shares are traded there is either a limitation on the acquisition of a specified percentage of control in the Company or the acquisition of a specified percentage of control requires the purchaser to also make a tender offer to the public.

The Companies Law extends the disclosure requirements applicable to an officer of the Company to a shareholder that holds 25% or more of the voting rights in a public company, including an Israeli company that is publicly traded outside of Israel such as on the OTC Bulletin Board. Certain transactions between a public company and a 25% shareholder, or transactions in which a 25% shareholder of the company has a personal interest but which are between a public company and another entity, require the approval of the board of directors and of the shareholders. Moreover, an extraordinary transaction with a 25% shareholder or the terms of compensation of a 25% shareholder must be approved by the audit committee, the board of directors and shareholders. The shareholder approval for an extraordinary transaction must include at least one third of the shareholders who have no personal interest in the transaction and are present at the meeting; the transaction can be approved by shareholders without this one third approval, if the total share holdings of those who vote against the transaction do not represent more than 1% of the voting rights in the company.

The Israeli Companies Ordinance requires that certain transactions, actions and arrangements be approved as provided for in the Company’s Articles of Association, by the Company’s board of directors, by the audit committee and/or by the Company’s shareholders. The vote required by the audit committee and the board for approval of such matters, in each case, is a majority of the disinterested directors participating in a duly convened meeting.

Changes in Capital

The Company’s Memorandum and Articles of Association do not impose any conditions governing changes in capital that are more stringent than required by the Israeli Companies Law.

C. Material Contracts.

On November 30, 2000, we entered into a purchase and assignment agreement (the “Purchase and Assignment Agreement”) with Eastek Embedded Systems (Meitav) Ltd. (“Eastek”), an Israeli based software company, and Eastek’s founder, Mr. Danny Shavit (“Mr. Shavit”), to acquire all the assets of Eastek. Under the terms of the Purchase and Assignment Agreement, we issued 60,000 of the Company’s Ordinary Shares to Eastek as partial consideration for the acquisition and issued an additional 20,000 Ordinary Shares to Eastek on the first anniversary of the acquisition.

In connection with our acquisition of Eastek, we hired Mr. Shavit to serve as Chief Technology Officer of the Company. On November 30, 2000, we entered into an employment agreement with Mr. Shavit under the terms of which we issued 100,000 of the Company’s Ordinary Shares to Mr. Shavit. Subject to certain conditions, the Ordinary Shares were to be delivered to Mr. Shavit in installments of 30,000, 35,000 and 35,000 Ordinary Shares on the first, second and third anniversaries of the acquisition respectively. The first installment and second installments of 30,000 Ordinary Shares and 35,000 Ordinary Shares, respectively, were delivered to Mr. Shavit and, pursuant to Mr. Shavit’s employment agreement, the remaining 35,000 Ordinary Shares were released from escrow and delivered to Mr. Shavit as a result of the termination of his employment with the Company during December 2002.

On December 20, 2000, we entered into agreements in principle with qualified investors and subsequently entered into a securities purchase agreement dated as of January 31, 2001 (the “Securities Purchase Agreement”) with CDC Holdings Ltd., Armour Investments Ltd., Industrial Systems & Equipment Co., Meir Noga and Nachum Ezra (the “Purchasers”). In accordance with the Securities Purchase Agreement, we issued units, each consisting of $100,000 principal amount of our convertible secured debentures (the “Debentures”) and three-year non-redeemable warrants (the “Warrants”) to acquire 10,000 Ordinary Shares, par value NIS .003 per share (the “Ordinary Shares”) to the Purchasers. We issued a total of 30 Units, representing Debentures in an aggregate principal amount of $3,000,000 and Warrants to acquire an aggregate of 300,000 Ordinary Shares.

In connection with StoreAge’s private placement, in January 2001, StoreAge entered into a shareholders’ rights agreement (the “Rights Agreement”) with the Company, Nelson Nahum, Ophirtech Ltd., Koonras Technologies Ltd., Genesis Partners II L.D.C., Genesis Partners II (Israel) L.P., Cisco Systems, Inc., Morgan Keegan & Company, Inc., Morgan Keegan Opportunity Fund, L.P., Morgan Keegan Employee Investment Fund, L.P. and certain other investors (each an “Investor” collectively, the “Investors”). Under the Rights Agreement, in addition to other provisions, each Investor has the right of first refusal to purchase any shares of StoreAge offered for sale by the Company and the other Investors.

In January 2001, the Company entered into a lease with West End Technology Investments Ltd. for office space located at 33 Jabotinsky Street, Ramat Gan, Israel. The lease is for an undefined term that began on February 1, 2001. Both parties have the right to terminate the lease at any time, by written notice of 75 days in advance. The annual rent for this space was approximately $43,000, with total annual occupancy costs, including local taxes, utilities, maintenance and other costs of approximately $24,000. As of April 1, 2003 (see Item 7. Major Shareholders and Related Party Transactions – B. Related Party Transactions), this lease was assumed by Enargis which now sublets 35% of the premises to the Company in consideration for 35% of the rent and the costs, which is approximately $15,050 and $8,400, respectively.

In order to maintain its Nasdaq SmallCap Market listing during the 2002 fiscal year, the Company entered into an agreement dated as of December 5, 2001 to amend the Securities Purchase Agreement with the Purchasers to exchange their Debentures and Warrants for the Company’s Ordinary Shares and cash. Under the terms of the agreement, the Purchasers converted part of the Debentures, the Warrants and the floating charge registered on the Company’s assets was cancelled and the Company repaid the Purchasers the principal amount of the Debentures which was not converted, plus interest accrued up to the date of the agreement. As a result of the completion of the transaction in December 2001, the Company had sufficient shareholders’ equity and net tangible assets to meet the requirements for continued inclusion on the NASDAQ SmallCap Market. However, the Company was subsequently delisted from the Nasdaq SmallCap Market effective January 23, 2003, for failure to continue to meet these requirements.

Under the terms of the transaction, the Purchasers converted $2,426,576.40 principal amount of the Debentures into an aggregate of 1,797,464 of the Company’s Ordinary Shares, received a cash payment of $573,423.60 and relinquished all of the Warrants. The Warrants and the remaining Debentures were cancelled. The transaction represented an implied exchange value of at least $1.35 per Ordinary Share based solely on the debt amounts extinguished, without giving any effect to the cancelled Warrants, and represented a substantial premium over the market price of the Company’s Ordinary Shares at the time the agreements in principle with the Purchasers were reached.

During 2000, the Company signed an agreement with its affiliate StoreAge according to which the Company would provide StoreAge iSCSI capabilities to StoreAge’s products in consideration of $200,000 according to the milestones defined in the agreement. During 2001, the companies agreed to expand this agreement to provide that the Company may receive an additional $196,000 in consideration for its services. As of December 31, 2002, the Company had recorded accumulated research and development services revenues of $145,000 related to these services. This agreement expired, in accordance with its terms, in October 2002.

D. Exchange Controls.

The Memorandum and Articles of Association of the Company do not restrict in any way the ownership of Ordinary Shares by nonresidents, except with respect to subjects of countries which are in a state of war with Israel, and neither the Memorandum and Articles of Association nor Israeli law restricts the voting rights of nonresidents. The Israeli Currency Control Law, 1978 imposes certain limitations concerning foreign currency transactions and transactions between Israeli and non-Israeli residents, which limitations may be regulated or waived by the Controller of Foreign Exchange at the Bank of Israel, through “general” and “special” permits. In May 1998, a new “general permit” was issued pursuant to which substantially all transactions in foreign currency are permitted. Any dividends or other distributions paid in respect of Ordinary Shares and any amounts payable upon the dissolution, liquidation or winding up of the affairs of a company, as well as the proceeds of any sale in Israel of the company’s securities to an Israeli resident are freely repatriable into non-Israeli currencies (including U.S. dollars) at the rate of exchange prevailing at the time of conversion, provided that any Israeli income tax owing has been paid on (or withheld from) such payments. Because exchange rates between the NIS and most foreign currencies fluctuate continuously, non-Israeli shareholders will be subject to any such currency fluctuation during the period from when such dividend is declared through the date payment is made in U.S. dollars.

E. Taxation.

The following is a summary of the current tax structure applicable to companies in Israel which may be relevant to us and our shareholders. The discussion is not intended, and should not be taken, as legal or professional tax advice and is not exhaustive of all possible tax considerations.

Recent Tax Reform

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, following its enactment by the Israeli Parliament on July 24, 2002. On December 17, 2002, the Israeli Parliament approved a number of amendments to the tax reform, which came into effect on January 1, 2003.

The tax reform, aimed at broadening the categories of taxable income and reducing the tax rates imposed on employment income, introduced the following, among other things:

	•	Reduction of the tax rate levied on capital gains (other than gains deriving from the sale of listed securities) derived after January 1, 2003, to a general rate of 25% for both individuals and corporations. With regard to assets acquired prior to January 1, 2003, the reduced tax rate will apply to a proportionate part of the gain, in accordance with the holding periods of the asset, before or after January 1, 2003, on a linear basis;

	•	Imposition of Israeli tax on all income of Israeli residents, individuals and corporations, regardless of the territorial source of income, including income derived from passive sources such as interest, dividends and royalties;

	•	Introduction of controlled foreign corporation (CFC) rules into the Israeli tax structure. Generally, under such rules, an Israeli resident who holds, directly of indirectly, 10% or more of the rights in a foreign corporation whose shares are not publicly traded, in which more than 50% of the rights are held directly or indirectly by Israeli residents, and a majority of whose income in a tax year is considered passive income, will be liable for tax on the portion of such income attributed to his holdings in such corporation, as if such income were distributed to him as a dividend;

	•	Imposition of capital gains tax on capital gains realized by individuals as of January 1, 2003, from the sale of shares of publicly traded companies (such gain was previously exempt from capital gains tax in Israel). For information with respect to the applicability of Israeli capital gains taxes on the sale of ordinary shares, see “Capital Gains Tax “ below; and

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Introduction of a new regime for the taxation of shares and options issued to employees and officers (including directors).

General Corporate Tax Structure

Israeli companies are subject to “Company Tax” at the rate of 36% of taxable income. The However, the effective tax rate payable by a company that derives income from an Approved Enterprise may be considerably less. We currently have no facilities which have received Approved Enterprise status.

Tax Benefits Under the Law for the Encouragement of Industry (Taxes), 1969

Pursuant to the Law for the Encouragement of Industry (Taxes), 1969, or the Industry Encouragement Law, an Industrial Company is a company resident in Israel, if at least 90% of the income of which, in a given tax year, determined in Israeli currency (exclusive of income from some government loans, capital gains, interest and dividends), is derived from an Industrial Enterprise owned by it. An “Industrial Enterprise” is defined as an enterprise whose major activity in a given tax year is industrial production activity.

Under the Industry Encouragement Law, Industrial Companies are entitled to the following preferred corporate tax benefits:

	•	amortization of purchases of know-how and patents over an eight-year period for tax purposes;

	•	the right to elect, under specified conditions, to file a consolidated tax return with additional related Israeli Industrial Companies; and

	•	accelerated depreciation rates on equipment and buildings.

Eligibility for benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority. We no longer qualify as an Industrial Company.

Taxation Under Inflationary Conditions

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

	•	There is a special tax adjustment for the preservation of equity whereby some corporate assets are classified broadly into fixed assets and non-fixed assets. Where a company’s equity, as defined in such 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 specific limitations, depreciation deductions on fixed assets and losses carried forward are adjusted for inflation based on the increase in the consumer price index.

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Capital gains on specific traded securities are normally exempt from tax for individuals and are taxable for companies. However, dealers in securities are subject to the regular tax rules applicable to business income in Israel.

Capital Gains Tax

Israeli law imposes a capital gains tax on the sale of capital assets. The law distinguishes between real gain and inflationary surplus. The inflationary surplus is a portion of the total capital gain that is equivalent to the increase of the relevant asset’s purchase price which is attributable to the increase in the Israeli consumer price index between the date of purchase and the date of sale. The real gain is the excess of the total capital gain over the inflationary surplus.

Prior to the tax reform, sales of our ordinary shares by individuals were generally exempt from Israeli capital gains tax for so long as they were quoted on Nasdaq or listed on a stock exchange in a country appearing in a list approved by the Controller of Foreign Currency and the Company qualified as an Industrial Company or an Industrial Holding Company.

Pursuant to the tax reform, generally, capital gains tax is imposed at a rate of 15% on real gains derived on or after January 1, 2003, from the sale of shares in companies (i) publicly traded on the Tel Aviv Stock Exchange (“TASE”) or; (ii) (subject to a necessary determination by the Israeli Minister of Finance) Israeli companies publicly traded on a recognized stock exchange outside of Israel.

This tax rate does not apply to: (i) dealers in securities; (ii) shareholders that report in accordance with certain provisions of the Inflationary Adjustment Law; or (iii) shareholders who acquired their shares prior to an initial public offering (that are subject to a different tax arrangement).

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. However, a request may be made to the tax authorities to consider the actual adjusted cost of the shares as the tax basis if it is higher than such average price.

Non-Israeli residents are exempt from Israeli capital gains tax on any gains derived from the sale of shares publicly traded on the TASE, and are exempt from Israeli capital gains tax on any gains derived from the sale of shares of Israeli companies publicly traded on a recognized stock exchange outside of Israel, provided however that such capital gains are not derived from a permanent establishment of such shareholders in Israel and provided that such shareholders did not acquire their shares prior to an initial public offering.

However, non-Israeli corporations will not be entitled to such exemption if an Israeli resident (i) has a controlling interest of 25% or more in such non-Israeli corporation, or (ii) is the beneficiary or is entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly.

In any event, the provisions of the tax reform shall not effect the exemption from capital gains tax for gains accrued before January 1, 2003, as described above.

In certain instances where our shareholders may be liable to Israeli tax on the sale of their ordinary shares, the payment of the consideration may be subject to the withholding of Israeli tax at the source.

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

Taxation of Non-Residents

Non-residents of Israel are subject to income tax on income accrued or derived from sources in Israel. Such sources of income include passive income such as dividends, royalties and interest, as well as non-passive income from services rendered in Israel. On distributions of dividends other than bonus shares or 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 U.S. corporation and if it held over 10% of our voting power in the year of the payment of the dividend and during the entire prior taxable year, and 15% for dividends generated by an approved enterprise) is withheld at source, unless a different rate is provided in a treaty between Israel and the shareholder’s country of residence. Under the U.S.-Israel Tax Treaty, the maximum tax on dividends paid to a holder of ordinary shares who is a Treaty U.S. Resident will be 25%.

United States Federal Income Tax Consequences

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

	•	broker dealers,

	•	financial institutions,

	•	certain insurance companies,

	•	investors liable for alternative minimum tax,

	•	tax exempt organizations,

	•	non-resident aliens of the U.S. or taxpayers whose functional currency is not the U.S. dollar,

	•	persons who hold the Ordinary Shares through partnerships or other pass-through entities,

	•	investors that actually or constructively own 10 percent or more of our voting shares,

	•	investors holding Ordinary Shares as part of a straddle, hedge, conversion transaction, or other integrated investment; and

	•	regulated investment companies.

This summary does not address the effect of any U.S. Federal taxation other than U.S. Federal income taxation. In addition, this summary does not include any discussion of state, local or foreign taxation.

Shareholders are urged to consult their tax advisors regarding the foreign and United States Federal, state and local tax considerations of an investment in Ordinary Shares.

For purposes of this summary, a “U.S. Holder” is a shareholder which is:

•	an individual who is a citizen or, for U.S. Federal income tax purposes, a resident of the United States;

•	a corporation (including any entity treated as a corporation for U.S. Federal income tax purposes) created or organized in or under the laws of the United States or any political subdivision thereof;

•	an estate whose income is subject to U.S. Federal income tax regardless of its source; or

•	a trust if:

	(a)	a court within the United States is able to exercise primary supervision over administration of the trust;

	(b)	one or more United States persons have the authority to control all substantial decisions of the trust; or

	(c)	it has a valid election in effect under applicable U.S. Treasury Regulations to be treated as a U.S. person.

Taxation of Dividends

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

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

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

In May 2003, the Job and Growth Tax Relief Reconciliation Act of 2003 was enacted (the “Act”). Under the Act, dividends received by an individual shareholder from U.S. corporations and certain qualified foreign corporations are taxed at the same rate applicable to net capital gain income. As such, the maximum rate applicable to dividend income received by an individual shareholder from a U.S. corporation and certain qualified foreign corporations has generally been reduced to 15%. However, an individual shareholder will not qualify for this lower rate if such shareholder does not hold a share of stock for more than 60 days during the 120 day period beginning 60 days before the ex-dividend date. Additionally, the reduced rate is not available for dividends to the extent that the individual shareholder is obligated to make related payments (whether pursuant to a short sale or otherwise) with respect to positions in substantially similar or related property.

A foreign corporation is a “qualified foreign corporation” if it is not a foreign personal holding company, a foreign investment company or a passive foreign investment company for the taxable year of the corporation in which the dividend is paid, or the preceding taxable year and either (i) is eligible for the benefits of a comprehensive income tax treaty with the United States which the United States Treasury Department determines is satisfactory for purposes of the new provision and which includes an exchange of information program, or (ii) the stock of the foreign corporation is readily tradable on an established securities market in the United States.

Under the Act, special rules will apply in determining an individual shareholder’s foreign tax credit limitation in the case of dividends which qualify for the lower rate.

The reduced rate applicable to dividend distributions is generally effective for taxable years beginning after December 31, 2002 but shall not apply to taxable years beginning after December 31, 2008.

Dispositions of Ordinary Shares

If a shareholder sells or otherwise disposes of Ordinary Shares, such shareholder will recognize gain or loss for U.S. Federal income tax purposes in an amount equal to the difference between the amount realized on the sale or other disposition and the adjusted tax basis of such Ordinary Shares. Subject to the discussion below under the heading “Passive Foreign Investment Companies,” such gain or loss generally will be capital gain or loss and will be long term capital gain or loss if a shareholder has held the Ordinary Shares for more than one year at the time of the sale or other disposition. In general, any gain that a shareholder recognizes on the sale or other disposition of Ordinary Shares will be U.S. source for purposes of the foreign tax credit limitation; losses, will generally be allocated against U.S. source income. Under the U.S.-Israel Treaty, gain on the disposition of Ordinary Shares may be treated as Israeli source, if the shareholder has held 10% or more of the voting power of the company at any time during the 12 months preceding the date of disposition. Deduction of capital losses is subject to certain limitations under the Code.

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

An accrual basis U.S. Holder may elect the same treatment required of cash basis taxpayers with respect to a sale or disposition of Ordinary Shares, provided that the election is applied consistently from year to year. Such election may not be changed without the consent of the Internal Revenue Service (the “IRS”). In the event that an accrual basis U.S. Holder does not elect to be treated as a cash basis taxpayer (pursuant to the Treasury regulations applicable to foreign currency transactions), such U.S. Holder may have a foreign currency gain or loss for U.S. federal income tax purposes because of differences between the U.S. dollar value of the currency received prevailing on the trade date and the settlement date. Any such currency gain or loss would be treated as ordinary income or loss and would be in addition to gain or loss, if any, recognized by such U.S. Holder on the sale or disposition of such Ordinary Shares.

Passive Foreign Investment Companies

For U.S. Federal income tax purposes, we will be considered a passive foreign investment company (“PFIC”) for any taxable year in which either (i) 75% or more of our gross income is passive income, or (ii) at least 50% of the average value of all of our assets for the taxable year produce or are held for the production of passive income. For this purpose, passive income includes dividends, interest, royalties, rents, annuities and the excess of gains over losses from the disposition of assets which produce passive income. If we were determined to be a PFIC for U.S. Federal income tax purposes, highly complex rules would apply to U.S. Holders owning Ordinary Shares. Accordingly, shareholders are urged to consult their tax advisors regarding the application of such rules.

Based on our current and projected income, assets and activities, we believe that we may be considered a PFIC.

If we are treated as a PFIC for any taxable year, then, unless a shareholder elects either to treat such shareholder’s investment in Ordinary Shares as an investment in a “qualified electing fund” (a “QEF election”) or to “mark to market” such shareholder’s Ordinary Shares, as described below:

	•	the shareholder would be required to allocate income recognized upon receiving certain dividends or gain recognized upon the disposition of Ordinary Shares ratably over the holding period for such Ordinary Shares;

	•	the amount allocated to each year during which we are considered a PFIC other than the year of the dividend payment or disposition would be subject to tax at the highest individual or corporate tax rate, as the case may be, and an interest charge would be imposed with respect to the resulting tax liability allocated to each such year;

	•	gain recognized upon the disposition of Ordinary Shares would be taxable as ordinary income; and

	•	the shareholder would be required to make an annual return on IRS Form 8621 regarding distributions received with respect to ordinary shares and any gain realized on such shareholder’s Ordinary Shares.

If a shareholder makes either a timely QEF election or a timely mark to market election in respect of such shareholder’s Ordinary Shares, the shareholder would not be subject to the rules described above. If a shareholder makes a timely QEF election, the shareholder would be required to include in such shareholder’s income for each taxable year such shareholder’s pro rata share of our ordinary earnings as ordinary income and such shareholder’s pro rata share of our net capital gain as long term capital gain, whether or not such amounts are actually distributed to the shareholder. A shareholder would not be eligible to make a QEF election unless we comply with certain applicable information reporting requirements.

Alternatively, if a shareholder elects to “mark to market” such shareholder’s Ordinary Shares, the shareholder will generally include in income any excess of the fair market value of the Ordinary Shares at the close of each tax year over such shareholder’s adjusted basis in the Ordinary Shares. If the fair market value of the Ordinary Shares had depreciated below the shareholder’s adjusted basis at the close of the tax year, the shareholder may generally deduct the excess of the adjusted basis of the Ordinary Shares over its fair market value at that time. However, such deductions generally would be limited to the net mark to market gains, if any, that the shareholder included in income with respect to such Ordinary Shares in prior years. Income recognized and deductions allowed under the mark to market provisions, as well as any gain or loss on the disposition of Ordinary Shares with respect to which the mark to market election is made, is treated as ordinary income or loss. For these purposes, stock will be treated as “marketable stock” for which a “mark-to-market” election can be made if (i) it is a class of stock which trades on a national securities exchange that is registered with the Securities and Exchange Commission or on a national market system established pursuant to Section 11A of the Securities Exchange Act of 1934 and (ii) which is regularly traded on such exchanges or markets, other than in de minimis quantities, on at least 15 days during each calendar quarter. However, it is unclear under current law whether shares being traded in the over-the-counter market qualify as “marketable stock” for these purposes. Shareholders are urged to consult their own tax advisors concerning their ability to make a “mark-to-market” election.

Backup Withholding and Information Reporting

Payments in respect of Ordinary Shares may be subject to information reporting to the IRS and U.S. backup withholding tax. Under the backup withholding rules, a shareholder maybe subject to backup withholding at the rate of up to 30% for payments made in 2002 and in 2003 (prior to May 28, 2003), and 28% thereafter. Backup withholding will not apply, however, if a shareholder (i) is a corporation or falls within certain exempt categories, and demonstrates the fact when so required, or (ii) furnishes a correct taxpayer identification number and makes any other required certification. Any amount withheld under these rules may be credited against a shareholder’s federal income tax liability.

Backup withholding is not an additional tax. Amounts withheld under the backup withholding rules may be credited against a U.S. Holder’s U.S. tax liability, and a U.S. Holder may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the IRS.

Any U.S. Holder who holds 10% or more in vote or value of our Ordinary Shares will be subject to certain additional United States information reporting requirements.

U.S. Gift and Estate Tax

An individual U.S. Holder of Ordinary Shares will be subject to U.S. gift and estate taxes with respect to Ordinary Shares in the same manner and to the same extent as with respect to other types of personal property.

F. Dividends and Paying Agents.

Not applicable.

G. Statements by Experts.

Not applicable.

H. Documents on Display.

The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and, accordingly, it files reports and other information with the Securities and Exchange Commission (the “SEC”). Individuals can inspect and copy those reports and other information at the public reference facilities maintained by the SEC at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. For more information on its public reference facilities, you can call the SEC at 1-800-SEC-0330. You can obtain copies of such material at prescribed rates from the Public Reference Section of the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549. Individuals can also obtain reports and other information from the Internet site maintained by the SEC at http://www.sec.gov.

In addition, documents referred to in this 20-F filing are available, at no cost, upon request from Robi Hartman, Chief Executive Officer, I.I.S. Intelligent Information Systems Limited, 33 Jabotinsky Street, Ramat Gan, Israel (Tel. 972-3-751-0007).

I. Subsidiary Information.

Not applicable.

Item 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In the normal course of business, the financial position of the Company is routinely subjected to a variety of risks, including market risk associated with interest rate movements and currency rate movements on non-U.S. dollar denominated assets and liabilities. The Company regularly assesses these risks and has established policies and business practices to protect against the adverse effects of these and other potential exposures. As a result, the Company does not anticipate material losses in these areas.

For purposes of specific risk analysis, the Company uses sensitivity analysis to determine the impacts that market risk exposures may have on the fair values of the Company’s financial instruments. The financial instruments included in the sensitivity analysis consist of all of the Company’s cash and cash equivalents.

To perform sensitivity analysis, the Company assesses the risk of loss in fair values from the impact of hypothetical changes in interest rates and foreign currency exchange rates on market sensitive instruments. The market values for interest risk are computed based on the present value of future cash flows as impacted by the changes in rates attributable to the market risk being measured. The discount rates used for the present value computations were selected based on market interest rates in effect at December 31, 2003. The market values for foreign exchange risk are computed based on spot rates in effect at December 31, 2003. The market values that result from these computations are compared to the market values of these financial instruments at June 30, 2003. The differences in this comparison are the hypothetical gains or losses associated with each type of risk.

The results of the sensitivity analysis are as follows:

Interest Rate Risk: A 10% decrease or a 10% increase in the levels of interest rates with all other variables held constant would not materially affect the earnings, cash flow and fair value of the Company’s near-term financial condition or results of operations.

Foreign Currency Exchange Rate Risk: A 10% movement in levels of foreign currency exchange rates against the U.S. dollar with all other variables held constant would not materially affect the earnings, cash flow and fair value of the Company’s near-term financial condition or results of operations.

Item 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

Not applicable.

PART II

Item 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

Not applicable.

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

Not applicable.

Item 15. CONTROLS AND PROCEDURES

Based on the evaluation of our disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of a date within 90 days of the filing date of this annual report on Form 20-F (the “Evaluation Date”), our chief executive officer and principal financial officer have concluded that our disclosure controls and procedures are designed to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and are operating in an effective manner.

Since the Evaluation Date, there have not been any significant changes in internal controls or in other factors that could significantly affect internal controls, nor have there been any corrective actions with regard to significant deficiencies and material weaknesses.

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

None of the members of our audit committee meets the definition of an audit committee financial expert, as defined in Item 16A1 of Form 20-F. This is due to our inability to attract a director with the requisite financial knowledge and experience .

ITEM 16B. CODE OF ETHICS

The Company has not adopted a written code of ethics for its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. Ethical oversight and actual or apparent conflicts of interest have historically been handled informally by senior management and the Board of Directors. The Company may address the adoption of such a code with the Board of Directors in the future.

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Fees Paid to Independent Public Accountants

The following table sets forth, for each of the years indicated, the fees paid to our independent public accountants and the percentage of each of the fees out of the total amount paid to the accountants.

	Year Ended December 31,

	2002		2003

Services Rendered	Fees		Fees


Audit (1)
Audit-related (2)	$	23,000	$	10,000
Tax (3)	$	1,000	$	0.00-
Other
Total	$	24,000	$	10,000

(1)	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.

(2)	Audit-related fees relate to assurance and associated services that traditionally are performed by the independent accountant, including: attest services that are not required by statute or regulation; accounting consultation and audits in connection with mergers, acquisitions and divestitures; employee benefit plans audits; and consultation concerning financial accounting and reporting standards.

(3)	Tax fees relate to services performed by the tax division for tax compliance, planning, and advice.

Pre-Approval Policies and Procedures

Our board of directors has not adopted a policy and procedures for the pre-approval of audit and non-audit services rendered by our independent public accountants, Kost, Forer, Gabbay & Kasierer, a member firm of Ernst & Young Global. No issue regarding these services has arisen in the last two fiscal years. The board of directors will deliberate these matters as and when they arise, on a case-by-case basis.

ITEM 16D. EXEMPTIONS FROM THE LISTING REQUIREMENTS AND STANDARDS FOR AUDIT COMMITTEE

Not applicable.

ITEM 16E. PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATES AND PURCHASERS

Neither we, nor any affiliated purchaser of our company, have purchased any of our securities during 2003.

PART III

Item 17. FINANCIAL STATEMENTS

Not applicable.

Item 18. FINANCIAL STATEMENTS

Attached. See Item 19(a) and (b).

Item 19. FINANCIAL STATEMENTS AND EXHIBITS

(a)	Index to Financial Statements of the Company:	Page

	Report of Independent Auditors on Consolidated Financial Statements of the Company and its subsidiary	F 2

	Consolidated Balance Sheets at December 31, 2003 and 2002	F 3 - F-4


	Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001	F 5

	Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2003, 2002 and 2001	F 6

	Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001	F 7 - F-8

	Notes to the Consolidated Financial Statements	F 9 - F-23

(b)	Index to Financial Statements of the StoreAge Networking Technologies Ltd.:	Page

	Report of Independent Auditors on Consolidated Financial Statements of StoreAge and its subsidiary	2

	Consolidated Balance Sheets at December 31, 2003 and 2002	3 – 4

	Consolidated Statements of Operations for the years ended December 31, 2003 and 2002	5

	Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2003 and 2002	6

	Consolidated Statements of Cash Flows for the years ended December 31, 2003 and 2002	7

	Notes to the Consolidated Financial Statements	8 – 22

(c)	Index to Financial Statements of Enargis Storage Solutions Ltd.:	Page

	Report of Independent Auditors on Financial Statements of Enargis	2

	Balance Sheet at December 31, 2003	3

	Statement of Operations for the year ended December 31, 2003	4

	Statement of Changes in Shareholders’ Equity for the year ended December 31, 2003	5

	Statement of Cash Flows for the year ended December 31, 2003	6

	Notes to the Consolidated Financial Statements	7 - 12

All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.

(c)		Exhibits

1.1		Memorandum of Association of the Company.*
1.2		Articles of Association of the Company, Amended and Restated as of November 19, 2000.**
4.1		Purchase and Assignment agreement between the Company and Eastek Embedded Systems (Meitav) Ltd., dated November 30, 2000.**
4.2		Employment Agreement of Danny Shavit, dated November 30, 2000.**
4.3		Summary English Translation from the original Hebrew of a Lease Agreement entered into between the Company and West End Technology Investments Ltd., for office space located at 33 Jabotinsky Street, Ramat Gan, Israel, dated January 30, 2001.**
4.4		Shareholders’ Rights Agreement dated as of January 18, 2001 between the Company, StoreAge and certain investors.**
4.5		Research & Development Subcontracting Agreement effective as of October 15, 2000, between the Company and StoreAge Networking Technologies Ltd.***
4.6		Agreement dated March 31, 2003 between the Company, Robi Hartman, Danny Shavit and Enargis Storage Solutions Ltd.
8.1		List of significant subsidiaries of the Company.
12.1		Certification by Chief Financial Officer and Acting Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
14.1		Consent of Kost Forer and Gabbay, a Member of Ernst & Young International.

* Incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement No. 33-62862 dated August 10, 1993.
** Incorporated by reference to the corresponding exhibit to the Company’s Annual Report on Form 20-F for the year ended December 31, 2000.
*** Incorporated by reference to the corresponding exhibit to the Company’s Annual Report on Form 20-F for the year ended December 31, 2001.

I.I.S. INTELLIGENT INFORMATION SYSTEMS LTD.
AND ITS SUBSIDIARY

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2003

IN U.S. DOLLARS

INDEX

	Page




Report of Independent Auditors	F-2
Consolidated Balance Sheets	F-3 - F-4
Consolidated Statements of Operations	F-5
Statements of Changes in Shareholders' Equity	F-6
Consolidated Statements of Cash Flows	F-7 - F-8
Notes to Consolidated Financial Statements	F-9 - F-23

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Shareholders of

I.I.S. INTELLIGENT INFORMATION SYSTEMS LTD.

We have audited the accompanying consolidated balance sheets of I.I.S. Intelligent Information Systems Ltd. (“the Company”) and its subsidiary as of December 31, 2003 and 2002 and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to report on these 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 management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1a, as of December 31, 2003, the Company is no longer engaged in any operational business activity.

As further discussed in Note 1d to the consolidated financial statements, on June 21, 2004, the Company’s Board of Directors has resolved to propose to the Company’s shareholders to approve a voluntary liquidation of the Company.

Because of the possible material effects on the financial statements referred to above of the matters described in the preceding paragraph, we are unable to, and do not, express an opinion on these financial statements.






Tel-Aviv, Israel	KOST FORER GABBAY & KASIERER
March 18, 2004	A Member of Ernst & Young Global

I.I.S. INTELLIGENT INFORMATION SYSTEMS LTD.

AND ITS SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

U.S. dollars in thousands

	December 31,
	2003		2002



ASSETS

CURRENT ASSETS:
Cash and cash equivalents	$	133	$	397
Restricted short-term bank deposit (Note 6b)		48		44
Receivable from affiliate		5		18
Receivables on account of a lawsuit settlement (Note 1c)		110		-
Other accounts receivable and prepaid expenses		25		30

Total current assets		321		489

SEVERANCE PAY FUND		5		4

PROPERTY AND EQUIPMENT, NET (Note 3)		9		56

	$	335	$	549

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

F-3

I.I.S. INTELLIGENT INFORMATION SYSTEMS LTD.

AND ITS SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

U.S. dollars in thousands (except share data)

	December 31,
	2003			2002



LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Trade payables	$	4		$	77
Other accounts payable and accrued expenses (Note 4)		105			214

Total current liabilities		109			291

ACCRUED SEVERANCE PAY		9			6

COMMITMENTS AND CONTINGENT LIABILITIES (Note 6)

SHAREHOLDERS' EQUITY: (Note 7)
Ordinary shares of NIS 0.003 par value
Authorized: 16,666,667 shares as of December 31, 2003 and 2002; Issued and
outstanding: 11,572,398 shares as of December 31, 2003 and 2002		55			55
Additional paid-in capital		41,417			41,417
Accumulated deficit		(41,255	)		(41,220	)

Total shareholders' equity		217			252

	$	335		$	549

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

F-4

I.I.S. INTELLIGENT INFORMATION SYSTEMS LTD.

AND ITS SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

U.S. dollars in thousands (except per share data)

	Year ended December 31,
	2003			2002			2001



Revenues:
Products (Note 9)	$	-		$	62		$	83
Research and development services rendered to an affiliate		-			145			251

		-			207			334

Cost of revenues:
Products		-			38			28
Research and development services to an affiliate		-			51			155

		-			89			183

Gross profit		-			118			151

Operating expenses:
Research and development		-			548			479
Selling and marketing		-			49			21
General and administrative		342			577			888
Impairment of goodwill		-			186			-
Non-recurring income, net (Note 10b)		-			(122	)		(180	)
Other operating income (Note 1c)		(330	)		-			-

Total operating expenses		12			1,238			1,208

Operating loss		(12	)		(1,120	)		(1,057	)

Financial expenses, net (Note10a)		(3	)		-			(56	)
Financial expenses in respect of conversion of convertible
debentures (Note 5)		-			-			(1,491	)

Total financial expenses, net (Note 10a)		(3	)		-			(1,547	)

Loss before equity in losses of an affiliate		(15	)		(1,120	)		(2,604	)
Equity in losses of an affiliate		(20	)		(1,250	)		(877	)

Net loss	$	(35	)	$	(2,370	)	$	(3,481	)

Basic and diluted net loss per share	$	-		$	(0.21	)	$	(0.37	)

Number of shares used in computing basic and diluted net loss
per share		11,572			11,485			9,409

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

F-5

I.I.S. INTELLIGENT INFORMATION SYSTEMS LTD.

AND ITS SUBSIDIARY

STATEMENTS OF SHAREHOLDERS' EQUITY

U.S. dollars in thousands (except share data)

	Share capital				Additional paid-in capital			Receivables on account of shares			Deferred stock compensation			Accumulated deficit			Total shareholders' equity
	Shares		Amount		Additional paid-in capital			Receivables on account of shares			Deferred stock compensation			Accumulated deficit			Total shareholders' equity



Balance as of January 1, 2001		8,987,324	$	54	$	37,435		$	(16	)	$	(222	)	$	(35,369	)	$	1,882
Net loss		-		-		-			-			-			(3,481	)		(3,481	)
Conversion of convertible debentures		1,797,464		1		2,426			-			-			-			2,427
Payments of receivables on account of shares		-		-		-			16			-			-			16
Exercise of warrants		613,648		*) -		183			-			-			-			183
Vested shares of key employee		30,000		*) -		-			-			-			-			*) -
Amortization of deferred stock compensation related to
shares in escrow issued upon acquisition of Eastek		-		-		-			-			133			-			133
Stock based compensation related to options granted to
employees of an affiliate		-		-		29			-			-			-			29
Beneficial conversion feature in respect of a
conversion of convertible debentures		-		-		1,346			-			-			-			1,346

Balance as of December 31, 2001		11,428,436		55		41,419			-			(89	)		(38,850	)		2,535

Net loss		-		-		-			-			-			(2,370	)		(2,370	)
Exercise of warrants		73,962		*) -		22			-			-			-			22
Vested shares of key employee		70,000		*) -		-			-			-			-			*) -
Issuance expenses related to conversion of convertible
debentures		-		-		(24	)		-			-			-			(24	)
Amortization of deferred stock compensation related to
shares in escrow issued upon acquisition of Eastek		-		-		-			-			89			-			89

Balance as of December 31, 2002		11,572,398		55		41,417			-			-			(41,220	)		252

Net loss		-		-		-			-			-			(35	)		(35	)

Balance as of December 31, 2003		11,572,398	$	55	$	41,417		$	-		$	-		$	(41,255	)	$	217

*) Represents an amount lower than $1.

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

F-6

I.I.S. INTELLIGENT INFORMATION SYSTEMS LTD.

AND ITS SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

U.S. Dollars in thousands

	Year ended December 31,
	2003			2002			2001



Cash flows from operating activities:
Net loss	$	(35	)	$	(2,370	)	$	(3,481	)
Adjustments required to reconcile net loss to net cash used in
operating activities:
Depreciation		6			33			127
Impairment of goodwill		-			186			-
Write-off of property		12			-			-
Amortization of deferred stock compensation		-			89			133
Stock based compensation related to options granted to
employees of an affiliate		-			-			29
Amortization of discount on convertible debentures		-			-			172
Equity in losses of an affiliate		20			1,250			877
Beneficial conversion feature in respect of conversion of
convertible debentures		-			-			1,346
Decrease in trade receivable		-			13			30
Increase in receivable from affiliate, receivable on account
of lawsuit settlement, other accounts receivable and prepaid
expenses		(92	)		82			(6	)
Decrease in trade payables		(73	)		(42	)		(58	)
Decrease in other accounts payable and accrued expenses		(109	)		(333	)		(857	)
Accrued severance pay, net		(2	)		(10	)		6
Finance income derived from USD exchange rate changes		(4	)		-			-
Other		4			1			(1	)

Net cash used in operating activities		(273	)		(1,101	)		(1,683	)

Cash flows from investing activities:
Proceeds from sale of property and equipment		9			5			1
Purchase of property and equipment		-			(7	)		(55	)
Investment in restricted deposit		-			-			(44	)
Proceeds from restricted deposit		-			-			600

Net cash provided by (used in) investing activities		9			(2	)		502

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

F-7

I.I.S. INTELLIGENT INFORMATION SYSTEMS LTD.

AND ITS SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

U.S. Dollars in thousands

	Year ended December 31,
	2003			2002			2001



Cash flows from financing activities:
Payments of receivables on account of shares and	$	-		$	-		$	16
Exercise of warrants		-			22			183
Repayment of long-term bank loans		-			(10	)		(10	)
Issuance of convertible debentures, net		-			(24	)		-
Repayment of convertible debentures		-			-			(573	)

Net cash used in financing activities		-			(12	)		(384	)

Decrease in cash and cash equivalents		(264	)		(1,115	)		(1,565	)
Cash and cash equivalents at the beginning of the year		397			1,512			3,077

Cash and cash equivalents at the end of the year	$	133		$	397		$	1,512

Non-cash transactions:
Conversion of convertible debentures	$	-		$	-		$	2,427

Supplemental disclosure of cash flows activities:
Interest paid during the year	$	4		$	8		$	145

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

F-8

I.I.S. INTELLIGENT INFORMATION SYSTEMS LTD.

AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands

NOTE 1:- GENERAL

Through December 2002, I.I.S. Intelligent Information Systems Ltd. (“the Company”) designed, developed and provided enterprise storage solutions for the Internet Small Computer Systems Interface (“iSCSI”). The Company’s products were customized software implementation projects for the development and integration of iSCSI interface into existing storage devices and a family of comprehensive IP storage testing tools, for iSCSI protocol analysis of SAN devices. Due to the slow down associated with the iSCSI revenues resulting from the delays in the adoption of the iSCSI protocol, the Company decided to cease its iSCSI operations in December 2002.

As of December 31, 2003, the Company is no longer engaged in any operational business activity.

On March 31, 2003, the Company entered into an agreement with Enargis Storage Solutions Ltd. (“Enargis”), a new company owned and controlled by related parties, under which Enargis purchased the iSCSI related activities in consideration of 25% of Enargis equity.

As of December 31, 2003 the investment in Enargis, which on the date of the transaction amounted to $20, was reduced to zero due to Enargis’s recurring losses.

Additionally, as of December 31, 2003, the Company holds 38.9% of StoreAge Networking Technologies Ltd. (“StoreAge” or “the affiliate”). StoreAge is an Israeli company, which is engaged in the development and marketing of products based on its SAN Virtualization technology.

As a result of the lack of resources to support the iSCSI operations, the Company issued dismissal letters to its employees during 2002. Consequently, the Company recorded a one time charge of $ 60 related to the cessation of iSCSI operations which was accounted for in accordance with Emerging Issues Task Force (“EITF”) No. 94-3 “Liability Recognition for Certain Employee Benefits and Other Costs to Exit an Activity (Including Certain Costs in Restructuring)", (“EITF No. 94-3”) and Staff Accounting Bulletin No. 100 “Restructuring and Impairment Charges” (“SAB No. 100”).

As of December 31, 2003, the major components of the 2002 employee dismissal charges were as follows:

	Original accruals		Utilized				Balance as of December 31, 2003
	Original accruals		Cash		Non-cash		Balance as of December 31, 2003



Employees termination benefits	$	35	$	35	$	-	$	-

Amortization of deferred stock
compensation		25		-		25		-

	$	60	$	35	$	25	$	-

F-9

I.I.S. INTELLIGENT INFORMATION SYSTEMS LTD.

AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands

NOTE 1:- GENERAL (Cont.)

During 2003, the Company reached a settlement designated to form a compromise of contested claims (“the Agreement”) with two of its former sub contractors.

In accordance with the Agreement the Company will be paid a total amount of $ 330 in order to resolve and release its claim filed with the District Court of Tel-Aviv Jaffa in 1998 against its subcontractors and the counter claim filed against the Company by the subcontractors.

The claim was filed by the Company as an outcome of a dispute with the subcontractors regarding certain obligations in connection with the development and manufacture of a component designated to be used in one of the Company’s products sold at that time.

The amount of $ 330 was recorded as other operating income in the statements of operations.

Subsequent to the balance sheet date, the Company’s Board Of Directors has resolved to propose to the Company’s shareholders to approve a voluntary liquidation of the Company (hereinafter the “Proposal”) to be resolved on the coming Shareholders Annual General Meeting (hereinafter the “AGM”).

At the issuance date of these audited financial statements no sufficient information was available with respect to the probability of the AGM approval of the Board’s Proposal.

Consequently, resulted by the possible material effect of AGM’s approval of the aforementioned Proposal on the Company’s financial statements the Company’s independent auditors were unable to, and did not express an opinion on these financials.

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”).

Use of estimates:

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Financial statements in U.S. dollars:

The functional currency of the Company is the U.S dollar, as the U.S. dollar is the primary currency of the economic environment in which the Company has operated and expects to continue to operate in the foreseeable future. The majority of the Company’s operations are currently conducted in Israel and most of the Israeli expenses are currently paid in new Israeli shekels (“NIS”); however, most of the expenses are denominated and determined in U.S. dollars. Investing activities including equity transactions are made in U.S. dollars.

F-10

I.I.S. INTELLIGENT INFORMATION SYSTEMS LTD.

AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

Accordingly, monetary accounts maintained in currencies other than the dollar are remeasured into dollars in accordance with Statement of Financial Accounting Standard No. 52, “Foreign Currency Translation” (“SFAS No. 52”). All transactions gains and losses of the remeasurement of monetary balance sheet items are reflected in the statement of operations as financial income or expenses, as appropriate.

Principles of consolidation:

The consolidated financial statements of the Company and its subsidiary include the accounts of the Company and its subsidiary. Intercompany balances have been eliminated upon consolidation.

Cash equivalents:

Cash equivalents are short-term highly liquid investments that are readily convertible to cash, with maturities of three months or less at date acquired.

Restricted short-term bank deposit:

The restricted short-term bank deposit is in respect of security for the settlement of a lawsuit (see Note 6b). The deposit is denominated in NIS and bears annual interest at an average rate of 4.9%. As of June 8, 2004, the Company has reached a settlement agreement with the plaintiff, which included a mutual waiver of claims. (See Note 6b)

Investments in affiliates:

Investments in affiliates are investments in companies held to the extent of 20% or more which the Company can exercise significant influence over operating and financial policy. The investment is accounted for under the hypothetical liquidation method, since the Company has the ability to exercise significant influence over operating and financial policies of the investee. The Company applies EITF 99-10, “Percentage Used to Determine the Amount of Equity Method Losses”. Accordingly, losses of the investee are recognized based on the ownership level of the particular investee security held by the investor.

As the Company has not guaranteed obligations and not otherwise committed to provide further financial support for any of the affiliated companies, the Company discontinued applying the equity method when the investment account was reduced to zero

F-11

I.I.S. INTELLIGENT INFORMATION SYSTEMS LTD.

AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

Property and equipment:

Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated by the straight-line method over the estimated useful lives of the assets, at the following annual rates:

			%




Computers and peripheral equipment			10 - 33
Office furniture and equipment			6 - 10
Motor vehicles			15

Impairment of long-lived assets:

The Company and its subsidiary’s long-lived assets are reviewed for impairment in accordance with Statement of Financial Accounting Standard No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets and Long-Lived Assets to Be Disposed Of” (“SFAS No. 144”), whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.

During the fiscal year 2003, the Company abandoned some of its office furniture and equipment. Accordingly, the Company recorded an impairment charge in the amount of $ 12.

Goodwill:

Goodwill represents the excess of the cost over the net assets of businesses acquired. . Under Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”) goodwill acquired in a business combination on or after July 1, 2001, is not amortized. Goodwill that arose from acquisitions prior to July 1, 2001, was amortized until December 31, 2001, on a straight-line basis over five years.

SFAS No. 142 requires goodwill to be tested for impairment on adoption and at least annually thereafter or between annual tests in certain circumstances, and written down when impaired, rather than being amortized as previous accounting standards required. Goodwill attributable to each of the reporting units is tested for impairment by comparing the fair value of each reporting unit with its carrying value. Fair value is determined using discounted cash flows, market multiples and market capitalization. Significant estimates used in the methodologies include estimates of future cash flows, future short-term and long-term growth rates, weighted average cost of capital and estimates of market multiples for each of the reportable units.

F-12

I.I.S. INTELLIGENT INFORMATION SYSTEMS LTD.

AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

During 2002, the Company performed the required impairment tests of goodwill’s fair value. Based on management assessment at December 31, 2002, the entire goodwill was impaired and written off.

Research and development costs:

Statement of Financial Accounting Standards No. 86 “Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed” (“SFAS No. 86”), requires capitalization of certain software development costs subsequent to the establishment of technological feasibility.

Based on the Company’s product development process, technological feasibility is established upon completion of a working model. The Company does not incur material costs between the completion of the working model and the point at which the products are ready for general release. Therefore, research and development costs are charged to the statement of operations as incurred.

Revenue recognition:

Through December 2002, the Company and its subsidiary had derived revenues from research and development services to an affiliate, licensing fees for their products and maintenance. The Company and its subsidiary sell their products primarily through its direct sales force.

Research and development services to an affiliate are recognized according to milestones determined in an agreement.

Maintenance revenues were deferred and recognized on a straight-line basis over the term of the maintenance agreement.
In addition, the Company is entitled to commissions of 3% out of revenues derived from outstanding customers of the Company, existing at that time, prior to the completion of the transaction with Enargis (See also note 1a).

Revenues from software license agreements are recognized when all criteria outlined in Statement Of Position (SOP) 97-2 “Software Revenue Recognition” (as amended) are met. Therefore, revenue from license fees is recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, no significant obligations with regard to implementation remain, the fee is fixed or determinable and collectability is probable.

The Company and its subsidiary do not grant a right of return to their customers. If the fee is not fixed or determinable, revenues are recognized as payments become due from the customer provided that all other revenue recognition criteria have been met.

Concentrations of credit risk:

Financial instruments that potentially subject the Company and its subsidiary to concentrations of credit risk consist principally of cash and cash equivalents, restricted short-term bank deposit and receivable on account of lawsuit settlement. The majority of the Company’s cash and cash equivalents, the restricted deposit, are deposited in U.S. dollars in major banks in Israel. Such deposits in the U.S. may be in excess of insured limits and are not insured in other jurisdictions. Management believes that the financial

F-13

I.I.S. INTELLIGENT INFORMATION SYSTEMS LTD.

AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

institutions that hold the investments of the Company and its subsidiary are financially sound and, accordingly, minimal risk exists with respect to these investments.

The Company and its subsidiary has no significant off-balance-sheet concentration of credit risk such as foreign exchange contracts, option contracts or other foreign hedging arrangements.

Basic and diluted net loss per share:

Basic net loss per share is computed based on the weighted average number of Ordinary shares outstanding during each year. Diluted net earnings per share is computed based on the weighted average number of Ordinary shares outstanding during each year, plus dilutive potential Ordinary shares considered outstanding during the year, in accordance with Statement of Financial Accounting Standard No. 128, “Earnings Per Share”(“SFAS No. 128”).

All outstanding stock options and warrants have been excluded from the calculation of the diluted net loss per Ordinary share because all such securities are antidilutive for all periods presented. The total weighted average number of Ordinary shares related to convertible debentures, options and warrants excluded from the calculation of diluted net loss per share were 774,717, 1,125,674 and 1,109,328 for the years ended December 31, 2003, 2002 and 2001, respectively.

Severance pay:

The Company’s liability for severance pay is calculated pursuant to Israel’s Severance Pay Law based on the most recent salary of the employees multiplied by the number of years of employment as of the balance sheet date for all employees in Israel. Employees are entitled to one month’s salary for each year of employment or a portion thereof. The Company’s liability for its employees is provided by monthly deposits with severance pay funds, insurance policies and by an accrual. The value of these policies is recorded as an asset in the Company’s balance sheet

The deposited funds include profits accumulated up to the balance sheet date. The deposited funds may be withdrawn only upon the fulfillment of the obligation pursuant to Israel’s Severance Pay Law or labor agreements. The value of the deposited funds is based on the cash surrendered value of these policies, and includes immaterial profits. Severance pay expenses for the years ended December 31, 2003, 2002 and 2001, were $ 4, $ 29 and $ 33, respectively.

F-14

I.I.S. INTELLIGENT INFORMATION SYSTEMS LTD.

AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

Accounting for stock based compensation:

The Company has elected to follow Accounting Principles Board Statement No. 25, “Accounting for Stock Options Issued to Employees” (“APB No. 25”) and FASB Interpretation No. 44 “Accounting for Certain Transactions Involving Stock Compensation” (“FIN No. 44”) in accounting for its employee stock option plans.

Under APB No. 25, when the exercise price of an employee stock option is equivalent to or above the market price of the underlying stock on the date of grant, no compensation expense is recognized.

The Company adopted the disclosure provisions of Financial Accounting Standards Board Statement No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure” (“SFAS No. 148”), which amended certain provisions of SFAS 123 to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation, effective as of the beginning of the fiscal year. The Company continues to apply the provisions of APB No. 25, in accounting for stock-based compensation.

Pro forma information regarding the Company’s net loss and net loss per share is required by SFAS No. 123 and has been determined as if the Company had accounted for its employee stock options under the fair value method prescribed by SFAS No. 123.

The fair value for options granted in 2003, 2002 and 2001 is amortized over their vesting period and estimated at the date of grant using a Black-Scholes options pricing model with the following weighted average assumptions:

	2002	2001




Dividend yield	0%	0%
Expected volatility	1.18	1.25
Risk-free interest	2%	5%
Expected life of up to	4 years	4 year

Pro forma information under SFAS No. 123, is as follows:

	Year ended December 31,
	2003			2002			2001



Net loss available to Ordinary shares - as
reported	$	(35	)	$	(2,370	)	$	(3,481	)
Add: Stock-based employee compensation -
intrinsic value		-			89			133
Deduct: Stock-based employee compensation -fair
value		(131	)		(187	)		(369	)

Pro forma:
Pro forma net loss	$	(166	)	$	(2,468	)	$	(3,717	)

Basic and diluted loss per share as reported	$	-		$	(0.21	)	$	(0.37	)

Basic and diluted pro forma net loss per share	$	(0.01	)	$	(0.23	)	$	(0.42	)

F-15

I.I.S. INTELLIGENT INFORMATION SYSTEMS LTD.

AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

Income taxes:

The Company and its subsidiary account for income taxes in accordance with Statement of Financial Accounting Standard No. 109, “Accounting for Income Taxes” (“SFAS No. 109”). This Statement prescribes the use of the liability method, whereby deferred tax asset and liability account balances are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company and its subsidiary provide a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value.

Fair value of financial instruments:

The following methods and assumptions were used by the Company and its subsidiary in estimating their fair value disclosure for financial instruments:

The carrying values of cash and cash equivalents, restricted short-term bank deposits, receivable on account of lawsuit settlement, affiliate receivable and trade payables approximate their fair value due to the short-term maturity of such instruments.

Impact of recently issued accounting standards:

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”). The objective of FIN 46 is to improve financial reporting by companies involved with variable interest entities. A variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. FIN 46 also requires disclosures about variable interest entities that the company is not required to consolidate but in which it has a significant variable interest. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period ending after March 15, 2004. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. As of December 31, 2003, the Company does not expect the adoption of FIN 46 to have a material impact on its consolidated financial statements.

F-16

I.I.S. INTELLIGENT INFORMATION SYSTEMS LTD.

AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands

NOTE 3:- PROPERTY AND EQUIPMENT

	December 31,
	2003		2002



Cost:
Computers and peripheral equipment	$	17	$	77
Office furniture and equipment		60		76
Motor vehicles		-		42

		77		195

Accumulated depreciation:
Computers and peripheral equipment		15		44
Office furniture and equipment		53		60
Motor vehicles		-		35

		68		139

Depreciated cost	$	9	$	56

Depreciation expenses for the years ended December 2003, 2002 and 2001 amounted to approximately $ 6, $ 33 and $ 30, respectively.

NOTE 4:- OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES

	December 31,
	2003		2002



Employees and payroll accruals	$	9	$	75
Provision for litigation		50		50
Accrued expenses and others		46		89

	$	105	$	214

NOTE 5:- FINANCING ARRANGEMENTS

Convertible debentures:

In December 2000, the Company issued to investors, convertible debentures and warrants to purchase 300,000 Ordinary shares in consideration of $ 3,000. The debentures were convertible, all or in part, at any time in which these debentures were outstanding, into the Company’s Ordinary shares, at a price per share of $ 3. The warrants granted were exercisable into the Company’s Ordinary shares at any time until December 2003 at a price per share of $ 4.5.

The discount on convertible debentures at the date of grant amounted to $ 145.

F-17

I.I.S. INTELLIGENT INFORMATION SYSTEMS LTD.

AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands

NOTE 5:- FINANCING ARRANGEMENTS (Cont.)

The Company accounted for these convertible debentures in accordance with Emerging Issues Task Force No. 98-5 “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios” (“EITF 98-5”) and Emerging Issues Task Force No. 00-27 “Application of EITF Issue No. 98-5 to Certain Convertible Instruments” (“EITF 00-27”). There was no beneficial conversion feature at the date of grant.

In December 2001, the Company signed an agreement with its lenders according to which the Company converted $ 2,427 of the principal amount into 1,797,646 Ordinary shares at a price per share of $ 1.35 and prepaid the remaining principal in the amount of $ 573. In addition, the lenders agreed to the cancellation of the warrants granted as part of the convertible debenture agreement.

The Company accounted for the adjustments resulted from the inducement conversion offer of the debentures and the cancellation of the warrants in accordance with Statement of Financial Accounting Standard No. 84 “Induced Conversions of Convertible Debt” (“SFAS No. 84”).

Accordingly, the Company recorded in 2001, $ 1,346 as financial expenses related to the beneficial conversion feature from the induced conversion offer and an additional $ 145 in respect of the discount on the convertible debentures.

NOTE 6:- COMMITMENTS AND CONTINGENT LIABILITIES

The Company participated in programs sponsored by the Israeli Government for the support of research and development activities. Through December 31, 2003, the Company had obtained grants from the Office of the Chief Scientist of Israel’s Ministry of Industry and Trade (“the OCS”) aggregating to $ 2,229 for certain of the Company’s research and development projects. The Company is obligated to pay royalties to the OCS, amounting to 3%-4% of the sales of the products and other related revenues generated from such projects, up to 100%-150% of the grants received. The obligation to pay these royalties is contingent on actual sales of the products and in the absence of such sales no payment is required. As of December 31, 2003, the aggregate contingent liability to the OCS amounted to $ 1,622.

A claim was filed against NetWiz Ltd. (a former subsidiary of the Company) in respect of a breach of a lease agreement. As part of agreement for the sale of NetWiz, the Company agreed to assume the liabilities in respect of the above claim.

The Company’s legal counsel estimated that the Company’s exposure does not exceed $50. The Company recorded provision in the amount of $ 50 in respect of this claim. On June 8, 2004, the Company reached a settlement agreement with the plaintiff in terms of which the Company accepted to pay a final and conclusive payment of $ 39 to the plaintiff, in consideration for the mutual waiver of all claims between the parties.

F-18

I.I.S. INTELLIGENT INFORMATION SYSTEMS LTD.

AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands

NOTE 6:- COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)

As of April 1, 2003 the Company’s directors agreed to suspend their compensation until the time the Company would obtain additional financial resources resulted from the sale of its investment in certain affiliated company.

As of December 31, 2003 the amount due and unpaid with respect to the suspension of director’s compensation amounted to $ 95.

NOTE 7:- SHARE CAPITAL

Ordinary shares:

The Ordinary shares of the Company are quoted on the OTC Bulletin Board in the United States.
The Ordinary shares confer upon the holders the right to receive notices of participate and vote in the general meetings of the Company and the right to receive dividends, if and when declared and the right to receive, upon liquidation, a pro rata share of any remaining assets.

Stock Option Plan:

Under the Company’s 1993 Stock Option Plan (“the Plan”), options may be granted to officers, directors, employees and consultants of the Company or its subsidiaries. Pursuant to the Plan, the Company reserved for issuance 1,192,929 Ordinary shares. As of December 31, 2003, 410,371 Ordinary shares of the Company are still available for future grant under the Plan. Each option granted under the Plan is exercisable until the earlier of the first vesting date from the date of grant of the option or the expiration date of the respective option plan. The 1993 option plan expired in October 2003. The exercise price of the options granted under the plans may not be less than 85% of the fair market value of the Company’s Ordinary shares on the date of grant. The options vest primarily up to 3-4 years. Any options, which are canceled or forfeited before expiration, become available for future grant.

A summary of the Company’s stock option activity and related information:

	2003						2002						2001
	Amount of options			Weighted average exercise price			Amount of options			Weighted average exercise price			Amount of options			Weighted average exercise price



Outstanding at the
beginning of the
year		1,008,802		$	7	.46		1,066,803		$	7	.77		1,148,150		$	10	.90

Granted		-						32,000		$	3	.63		26,000		$	3	.62
Exercised		-						-		$	-			-		$	-
Forfeited and
cancelled		(227,040	)	$	17	.3		(90,001	)	$	(9	.68)		(107,347	)	$	31	.67

Outstanding at the
end of the year		781,762		$	4	.67		1,008,802		$	7	.46		1,066,803		$	7	.77

Exercisable at the
end of the year		665,662		$	4	.86		664,971		$	9	.45		553,136		$	11	.61

F-19

I.I.S. INTELLIGENT INFORMATION SYSTEMS LTD.

AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands

NOTE 7:- SHARE CAPITAL (Cont.)

The options outstanding as of December 31, 2003, have been separated into ranges of exercise price, as follows:

Ranges of exercise price			Weighted average exercise price			Weighted average exercise price
(Years)



$3.63	541,050	4.1	$	3.63	425,035	$	3.63
$3.93 -$5.79	123,553	3.68	$	5.48	122,760	$	5.49
$6.06 - $8.82	112,953	2.15	$	7.89	112,867	$	7.89
$24.00 - $28.89	5,000	1.34	$	25.50	5,000	$	25.50

	781,762	2.73	$	4.67	665,662	$	4.86

Weighted average fair values and weighted average exercise prices of an option whose exercise price is equal to or exceeds market price of the shares at date of grant are as follows:

	Year ended December 31,
	2003				2002				2001
	Weighted average fair value		Weighted average exercise price		Weighted average fair value		Weighted average exercise price		Weighted average fair value		Weighted average exercise price


Exceeds market price
at date of grant		-		-	$	0.74	$	3.63	$	0.92	$	3.62

During 2000, the status of StoreAge’s employees was changed from that of employees to non-employees. This resulted from the decrease in the Company’s equity interest in StoreAge, and the de-consolidation of StoreAge. Additionally, during 2001, three employees of the Company became StoreAge’s employees.

Consequently, options granted to the aforementioned employees were remeasured at the date of change in status under the fair value method, according to FIN No. 44 and SFAS No. 123.

The fair value for these options was estimated using the Black-Scholes option valuation model with the following weighted-average assumptions for each of the three years in December 31, 2003, 2002 and 2001: risk-free interest rates of 3%, 2% and 5%, respectively, dividend yields of 0% for each year, volatility factors of the expected market price of the Company’s Ordinary shares of 1.52, 1.18 and 1.25, respectively, and a weighted-average expected life of an option of four years for each year. The weighted average fair value of these options is $ 0.22, $ 0.18 and $ 0.93 per option for 2003, 2002 and 2001, respectively.

Compensation expenses of approximately $ 0, $0 and $ 29 were recognized during the years ended December 31, 2003, 2002 and 2001, respectively.

During the years ended December 31, 2003 and 2002 no compensation expenses were recorded due to immateriality of compensation amounts.

F-20

I.I.S. INTELLIGENT INFORMATION SYSTEMS LTD.

AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands

NOTE 7:- SHARE CAPITAL (Cont.)

Dividends:

Dividends, when declared, will be paid in new Israeli shekels (“NIS”). Dividends paid to shareholders outside Israel will be converted into dollars, on the basis of the exchange rate prevailing at the date of payment. The Company does not intend to pay cash dividends in the foreseeable future.

NOTE 8:- INCOME TAXES

Measurement of taxable income under the Income Tax (Inflationary Adjustments) Law, 1985:

Results of the Company and its Israeli subsidiary for tax purposes are measured in terms of earnings in NIS after certain adjustments for increases in Israel’s Consumer Price Index (“CPI”). As explained in Note 2b, the financial statements are prepared in U.S. dollars. The difference between the annual change in Israel’s CPI and in the NIS/U.S. dollar exchange rate results in a difference between taxable income and the income before taxes reported in the financial statements. In accordance with paragraph 9(f) of SFAS No. 109, the Company and its Israeli subsidiary have not provided deferred income taxes on the difference between the reporting currency and the tax bases of assets and liabilities.

Loss before taxes on income, equity in losses of an affiliate and minority interest in losses of subsidiary amounted to $ 15, $ 1,120 and $ 2,604 in the years ended December 31, 2003, 2002 and 2001, respectively. All these losses are domestic.

Deferred income taxes:

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

As of December 31, 2003, the Company has provided a valuation allowance in respect of deferred tax assets resulting from tax loss carryforwards in a total amount of $13,310. Management currently believes that since the Company and its subsidiary have a history of losses it is more likely than not that the deferred tax regarding the loss carryforwards and other temporary differences will not be realized in the foreseeable future.

The main reconciling items between the statutory tax rate of the Company and the effective tax rate are the non-recognition of tax benefits resulted from the Company’s accumulated net operating losses carryforward due to the uncertainty of the realization of such tax benefits.

F-21

I.I.S. INTELLIGENT INFORMATION SYSTEMS LTD.

AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands

NOTE 8:- INCOME TAXES (Cont.)

Tax loss carryforward:

As of December 31, 2003, the Company has carryforward tax losses in the amount of approximately $ 36,969, which may be carried forward and offset against taxable income in the future for an indefinite period.

In addition, the Company has accumulated capital losses for tax purposes carryforward in a total amount of $ 35,684, which may offset against future capital gain for tax purposes for a period of seven years. The Company did not provide a deferred tax asset related to the capital losses balance.

NOTE 9:- GEOGRAPHIC INFORMATION

The Company operates in one reportable segment (see Note 1 for a brief description of the Company’s business) and follows the requirements of Statement of Financial Accounting Standard No. 131, “Disclosures About Segments of an Enterprise and Related Information”, (“SFAS No. 131”).

The following presents total revenues on the basis of the location of the end customers for the years ended December 31, 2003, 2002 and 2001 and long-lived assets as of December 31, 2003, 2002 and 2001:

	Year ended December 31,
	2003		2002		2001



Sales to unaffiliated customers:

United States	$	-	$	54	$	19
Israel		-		8		64

	$	-	$	62	$	83

Long-lived assets:

Israel	$	9	$	56	$	274

F-22

I.I.S. INTELLIGENT INFORMATION SYSTEMS LTD.

AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands

NOTE 10:- SELECTED STATEMENTS OF OPERATIONS DATA

	Year ended December 31,
	2003			2002			2001



a. Financial expenses:

Interest income	$	3		$	-		$	131

Financial expenses:
Interest expenses		4			8			(170	)
Foreign currency translation differences		2			(8	)		(17	)
Beneficial conversion feature and
amortization of discount of
convertible debentures		-			-			(1,491	)

		6			-			(1,678	)

	$	(3	)	$	-		$	(1,547	)

b. Non-recurring income, net:
	Year ended December 31,
	2003			2002			2001



Reversal of sales taxes provision	$	-		$	10		$	180
Reversal of a lawsuit provision		-			216			-
Loan write off		-			(44	)		-
Restructuring charges (see also Note 1b)		-			(60	)		-

	$	-		$	122		$	180

F-23

STOREAGE NETWORKING TECHNOLOGIES LTD.
AND ITS SUBSIDIARY

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2003

IN U.S. DOLLARS

INDEX

	Page


Report of Independent Auditors	2

Consolidated Balance Sheets	3 - 4

Consolidated Statements of Operations	5

Statements of Changes in Shareholders’ Equity	6

Consolidated Statements of Cash Flows	7

Notes to Consolidated Financial Statements	8 - 22

- - - - - - - - - - - - - - -

LOGO

REPORT OF INDEPENDENT AUDITORS

To the Shareholders of

STOREAGE NETWORKING TECHNOLOGIES LTD.

We have audited the accompanying consolidated balance sheets of StoreAge Networking Technologies Ltd. (“the Company”) and its subsidiary as of December 31, 2003 and 2002, and the related consolidated statements of operations, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and its subsidiary as of December 31, 2003 and 2002, and the consolidated results of their operations and cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States.

Tel-Aviv, Israel
February 10, 2004

KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global

- 2 -

STOREAGE NETWORKING TECHNOLOGIES LTD.
AND ITS SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

U.S. dollars in thousands

	December 31,

	2003		2002

ASSETS

CURRENT ASSETS:
Cash and cash equivalents	$	5,386	$	10,467
Current maturities of long-term bank deposits		29		-
Trade receivables (net of allowance for doubtful accounts of $ 78 and $ 36 as of December 31, 2003 and 2002, respectively)		351		193
Other accounts receivable and prepaid expenses (Note 3)		255		126
Inventories (Note 4)		157		178


Total current assets		6,178		10,964


LONG-TERM INVESTMENTS:
Loan to an employee (Note 5)		114		110
Long-term bank deposits		58		100
Long-term prepaid expenses		43		92
Others		-		49


Total Long term investments		215		351


PROPERTY AND EQUIPMENT, NET (Note 6)		742		1,105


Total assets	$	7,135	$	12,420

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

- 3 -

STOREAGE NETWORKING TECHNOLOGIES LTD.
AND ITS SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

U.S. dollars in thousands (except share data)

	December 31,

	2003			2002


LIABILITIES AND SHAREHOLDERS’ EQUITY

CURRENT LIABILITIES:
Current maturities of long-term loans	$	-		$	1
Trade payables		290			313
Employees and payroll accruals		633			556
Deferred revenues		1,006			302
Other current liabilities		150			185
Related party - current account (Note 11)		5			15


Total current liabilities		2,084			1,372


ACCRUED SEVERANCE PAY		14			17


COMMITMENTS AND CONTINGENT LIABILITIES (Note 7)

SHAREHOLDERS’ EQUITY (Note 8):
Ordinary shares of NIS 0.01 par value - Authorized: 35,981,370 shares at December 31, 2003 and December 31, 2002; Issued and outstanding: 5,025,000 shares at December 31, 2003 and December 31, 2002		12			12
Preferred A shares of NIS 0.01 par value - Authorized: 3,537,790 shares at December 31, 2003 and December 31, 2002; Issued and outstanding: 3,537,790 shares at December 31, 2003 and December 31, 2002; Aggregate liquidation preference of approximately $ 3,200 at December 31, 2003 and December 31, 2002		9			9
Preferred B shares of NIS 0.01 par value - Authorized: 10,480,840 shares at December 31, 2003 and December 31, 2002; Issued and outstanding: 7,605,836 shares at December 31, 2003 and December 31, 2002; Aggregate liquidation preference of approximately $ 31,000 and $ 29,000 at December 31, 2003 and December 31, 2002, respectively		18			18
Additional paid-in capital		27,145			27,145
Accumulated deficit		(22,147	)		(16,153	)


Total shareholders’ equity		5,037			11,031


Total liabilities and shareholders’ equity	$	7,135		$	12,420

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


	Robi Hartman Chairman of the Board of Directors		Eli Shapira Chief Executive Officer

- 4 -

STOREAGE NETWORKING TECHNOLOGIES LTD.
AND ITS SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

U.S. dollars in thousands

	Year ended December 31,

	2003			2002			2001


Revenues (Note 10)	$	1,944		$	722		$	683
Cost of revenues		782			270			307


Gross profit		1,162			452			376


Operating expenses:
Research and development, net (Net of grants and participation of $ 653, $ 0 and $ (17) for the year ended December 31, 2003, 2002 and 2001, respectively)		2,614			3,760			3,212
Selling and marketing, net		3,550			4,498			1,404
General and administrative		1,057			1,104			995


Total operating expenses		7,221			9,362			5,611


Operating loss		6,059			8,910			5,235
Financial income, net		(65	)		(132	)		(748	)


Net loss	$	5,994		$	8,778		$	4,487

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

- 5 -

STOREAGE NETWORKING TECHNOLOGIES LTD.
AND ITS SUBSIDIARY

STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

U.S. dollars in thousands (except share data)

	Ordinary shares					Preferred shares					Additional paid-in capital		Accumulated deficit				Total shareholders’ equity

	Shares		Amount			Shares		Amount


Balance as of January 1, 2001		5,025,000		$	12		7,797,058		$	19	$	16,900		$	(2,888	)		$	14,043

Issuance of Preferred B shares and warrants, net		-			-		3,346,568			8		10,243			-				10,251
Stock compensation related to options granted to consultants		-			-		-			-		2			-				2
Net loss		-			-		-			-		-			(4,487	)			(4,487	)


Balance as of December 31, 2001		5,025,000			12		11,143,626			27		27,145			(7,375	)			19,809

Net loss		-			-		-			-		-			(8,778	)			(8,778	)


Balance as of December 31, 2002		5,025,000			12		11,143,626			27		27,145			(16,153	)			11,031

Net loss		-			-		-			-		-			(5,994	)			(5,994	)


Balance as of December 31, 2003		5,025,000		$	12		11,143,626		$	27	$	27,145		$	(22,147	)		$	5,037

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

- 6 -

STOREAGE NETWORKING TECHNOLOGIES LTD.
AND ITS SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

U.S. dollars in thousands

	Year ended December 31,

	2003			2002			2001

Cash flows from operating activities:
Net loss	$	(5,994	)	$	(8,778	)	$	(4,487	)
Adjustments required to reconcile net loss to net cash used in operating activities:
Depreciation		557			562			328
Loss on sale of property and equipment		-			5			16
Increase in trade receivables		(158	)		(113	)		(27	)
Decrease (increase) in other accounts receivable and prepaid expenses		(80	)		70			(24	)
Decrease (increase) in inventories		21			76			(152	)
Increase (decrease) in trade payables		33			(80	)		70
Increase in other current liabilities		747			438			256
Related party		(10	)		(5	)		(76	)
Accrued severance pay, net		(3	)		17			-
Accrued interest on a long-term loan to an employee		(4	)		-			-
Other		-			-			5


Net cash used in operating activities		(4,891	)		(7,808	)		(4,091	)


Cash flows from investing activities:
Long-term loan to an employee		-			-			(110	)
Proceeds from long-term bank deposits		52			-			-
Investment in long-term bank deposits		-			(8	)		(145	)
Purchase of property and equipment		(271	)		(535	)		(795	)
Proceeds from sale of property and equipment		21			5			11
Long-term prepaid expenses		9			(3	)		-


Net cash used in investing activities		(189	)		(541	)		(1,039	)


Cash flows from financing activities:
Principal payment of long-term loans		(1	)		(36	)		(72	)
Proceeds from issuance of share capital, net		-			-			10,111


Net cash used in financing activities		(1	)		(36	)		10,039


Decrease in cash and cash equivalents		(5,081	)		(8,385	)		4,904
Cash and cash equivalents at the beginning of the year		10,467			18,852			13,943


Cash and cash equivalents at the end of the year	$	5,386		$	10,467		$	18,852


Supplemental disclosure of cash flows information:

Non-cash and cash equivalents investing transactions:

Purchase of property and equipment	$	-		$	56		$	-


Cash paid during the year for interest	$	8		$	-		$	5

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

- 7 -

STOREAGE NETWORKING TECHNOLOGIES LTD.
AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands

NOTE 1:-	GENERAL

	StoreAge Networking Technologies Ltd. (“the Company”) was incorporated in January 1999. The Company develops, markets and sells data storage networking solutions for open system, host independent, multi-server environments.

	During 2000, the Company established a wholly-owned subsidiary - StoreAge Networking Technologies Inc. (“the subsidiary”), which is engaged in the selling and marketing of the Company’s products in the United States.

NOTE 2:-	SIGNIFICANT ACCOUNTING POLICIES

	The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States.

	a.	Use of estimates:

		The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

	b.	Financial statements in U.S. dollars:

		The Company’s transactions are recorded in New Israeli Shekels (“NIS”); however, the majority of the revenues of the Company and its subsidiary is generated in U.S. dollars (“dollar”). In addition, a substantial portion of the Company’s costs is incurred or denominated in dollars. Company’s management believes that the dollar is the primary currency of the economic environment in which the Company and its subsidiary operate. Thus, the functional and reporting currency of the Company and its subsidiary is the dollar.

		Accordingly, monetary accounts maintained in currencies other than the dollar are remeasured into U.S. dollars in accordance with Statement of Financial Accounting Standard No. 52 “Foreign Currency Translation” (“SFAS No. 52”). All transaction gains and losses from the remeasurement of monetary balance sheet items are reflected in the statements of operations as financial income or expenses, as appropriate.

	c.	Principles of consolidation:

		The consolidated financial statements include the accounts of the Company and its subsidiary. Intercompany transactions and balances, including profits from intercompany sales not yet realized outside the Group, have been eliminated upon consolidation.

- 8 -

STOREAGE NETWORKING TECHNOLOGIES LTD.
AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands

NOTE 2:-	SIGNIFICANT ACCOUNTING POLICIES (Cont.)

	d.	Cash equivalents:

		Cash equivalents include short-term highly liquid investments that are readily convertible to cash with maturities of three months or less.

	e.	Inventories:

		Inventories are stated at the lower of cost or market value. Inventory write-offs are provided to cover risks arising from slow-moving items or technological obsolescence.

		During 2003, the Company recorded inventories write-off in a total amount of $ 94.

		Cost is determined as follows:

		Raw materials, parts and supplies - using the “first-in, first-out” method.

		Finished products - on the basis of direct manufacturing costs with the addition of allocable indirect manufacturing costs.

	f.	Long-term bank deposits:

		Bank deposits with maturities of more than one year are included in long-term investments, and presented at their cost including accrued interest. As of December 31, 2003, most of the bank deposits are in U.S. dollars and bear interest at a weighted average interest rate of 0.97%.

	g.	Property and equipment:

		Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated by the straight-line method over the estimated useful lives of the assets, at the following annual rates:


			%


		Computers and peripheral equipment	33
		Office furniture	6 - 15
		Motor vehicles	15
		Leasehold improvements	over the term of the lease

		The Company and its subsidiary’s long-lived assets are reviewed for impairment in accordance with Statement of financial Accounting Standard No. 144 “Accounting for the Impairment of Disposal of Long-Lived Assets” (“SFAS No. 144”) whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.

- 9 -

STOREAGE NETWORKING TECHNOLOGIES LTD.
AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands

NOTE 2:-	SIGNIFICANT ACCOUNTING POLICIES (Cont.)

		As of December 31, 2003, no impairment losses have been identified.

	h.	Research and development costs:

		Statement of Financial Accounting Standards (“SFAS”) No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed”, requires capitalization of certain software development costs subsequent to the establishment of technological feasibility.

		Based on the Company’s product development process, technological feasibility is established upon completion of a working model. The Company does not incur material costs between the completion of the working model and the point at which the products are ready for general release. Therefore, research and development costs, net of grants received, are charged to the statement of operations as incurred.

	i.	Warranty costs:

		The Company offers a warranty of up to 12 months for its hardware modules at no extra charge. The Company estimates the costs that may be incurred under its warranty and records a liability in the amount of such costs at the time product revenue is recognized.

	j.	Income taxes:

		The Company and its subsidiary account for income taxes in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, “Accounting for Income Taxes”. This statement prescribes the use of the liability method, whereby deferred tax asset and liability account balances are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company and its subsidiary provide a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value.

	k.	Revenue recognition:

		The Company derives its revenues from sales of hardware, license fees of its products, training, installation maintenance and support fees. The Company sells its products primarily through its direct sales force and indirectly through distributors.

		The Company adopted Statement of Position (SOP) 97-2, “Software Revenue Recognition,” as amended. SOP 97-2, generally requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative fair value of the elements. The Company has also adopted SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions,” for all transactions entered into after January 1, 2000. SOP 98-9 requires that revenue be recognized under the “residual method” when vendor specific objective evidence (VSOE) of fair value exists for all undelivered elements and no VSOE exists for the delivered elements.

- 10 -

STOREAGE NETWORKING TECHNOLOGIES LTD.
AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 2:-	SIGNIFICANT ACCOUNTING POLICIES (Cont.)

		Revenue from license fees is recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, no significant obligations with regard to implementation remain, the fee is fixed or determinable, and collectibility is probable. The Company does not grant a right of return to its customers.

		When contracts contain multiple elements wherein VSOE of fair value exists for all undelivered elements, the Company accounts for the delivered elements in accordance with the “Residual Method” prescribed by SOP 98-9. Maintenance training and installation revenues included in these arrangements are deferred and recognized on a straight-line basis over the term of the maintenance and services provided. The VSOE of fair value of the undelivered elements (maintenance and services) is determined based on the price charged for the undelivered element when sold separately.

		When VSOE has not been established, revenues from license fees are recognized on a straight line basis over the term of the maintenance and services agreement.

		Deferred revenues include unearned amounts received under license fees and professional services, which are recognized on a straight-line basis over the term of the maintenance agreement.

	l.	Concentrations of credit risks:

		Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and trade receivables.

		The Company’s cash and cash equivalents are denominated in U.S. dollars and invested mainly in major banks in Israel and the U.S. Such deposits in the U.S. may be in excess of insured limits and are not insured in other jurisdictions. Management believes that the financial institutions that hold the Company’s investments are financially sound and, accordingly, minimal risk exists with respect to these investments.

		The Company’s trade receivables are derived from sales to customers located primarily in the U.S. and Europe. No collateral is required. The allowance for doubtful accounts is determined with respect to specific debts that are doubtful of collection.

		The Company has provided a long-term loan to its employee, amounting to $ 110 and $114 as of December 31, 2002 and 2003, respectively (see Note 5).

		The Company and its subsidiary had no off-balance-sheet concentration of credit risk such as foreign exchange contracts, option contracts or other foreign hedging agreement.

- 11 -

STOREAGE NETWORKING TECHNOLOGIES LTD.
AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 2:-	SIGNIFICANT ACCOUNTING POLICIES (Cont.)

	m.	Accounting for stock based compensation:

		The Company has elected to follow Accounting Principles Board Statement No. 25, “Accounting for Stock Options Issued to Employees” (“APB No. 25”) and FASB Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation” (“FIN No. 44”) in accounting for its employee stock option plans. Under APB No. 25, when the exercise price of an employee stock option is equivalent to or above the market price of the underlying stock on the date of grant, no compensation expense is recognized.

		The Company adopted the disclosure provisions of Financial Accounting Standards Board Statement No. 148, “Accounting for Stock-Based Compensation - transition and disclosure” (“SFAS No. 148”), which amended certain provisions of SFAS 123 to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation, effective as of the beginning of the fiscal year. The Company continues to apply the provisions of APB No. 25, in accounting for stock-based compensation.

		Pro forma information regarding net loss is required by SFAS No. 123 and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using the Black-Scholes Option Valuation Model with the following weighted-average assumptions for the year ended December 31, 2003, 2002 and 2001: expected volatility of 0 for each year; risk-free interest rates of 3% for the years ended December 31, 2003 and 2002, and 3.5% for the year ended December 31, 2001, dividend yields of 0% for each year and a weighted-average expected life of the option of 5 for each year.

		For purposes of pro forma disclosure, the estimated fair value of the options is amortized to expense over the options’ vesting period.

		Pro forma information under SFAS-123:

	Year ended December 31,

	2003		2002		2001


Net loss as reported	$	5,994	$	8,778	$	4,487


Pro forma net loss	$	6,089	$	8,850	$	4,552

The Company applies SFAS No. 123 and Emerging Issues Task Force (“EITF”) No. 96-18 “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services” (“EITF 96-18”), with respect to options and warrants issued to non-employees. SFAS No. 123 requires the use of option valuation models to measure the fair value of the options and warrants at the date of grant.

- 12 -

STOREAGE NETWORKING TECHNOLOGIES LTD.
AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 2:-	SIGNIFICANT ACCOUNTING POLICIES (Cont.)

	n.	Royalty-bearing grants:

		Royalty-bearing grants from the Government of Israel for funding approved research and development projects are recognized at the time the Company is entitled to such grants, on the basis of the related costs incurred and included as a deduction of research and development costs.
		During 2003, the Company received grants amounting to $ 653.

	o.	Severance pay:

		The Company’s liability for severance pay is calculated pursuant to Israeli severance pay law based on the most recent salary of the employees multiplied by the number of years of employment, as of the balance sheet date. Employees are entitled to one month’s salary for each year of employment or a portion thereof.

		Severance expenses for the years ended December 31, 2003, 2002 and 2001, amounted to approximately $ 211, $ 213 and $ 150, respectively.

	p.	Fair value of financial instruments:

		The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:

		The carrying amount of cash and cash equivalents, trade receivables and trade payables approximate their fair value due to the short-term maturity of such instruments.

	q.	Impact of recently issued accounting standards:

		In April 2002, the FASB issued Statement of Financial Accounting Standard No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections” (“SFAS No. 145”), which rescinds SFAS No. 4, “Reporting Gains and Losses from Extinguishment of Debt” and an amendment of that Statement, and SFAS No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements.” SFAS No. 145 also rescinds SFAS No. 44, “Accounting for Intangible Assets for Motor Carriers.” SFAS No. 145 amends SFAS No. 13, “Accounting for Leases,” to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS No. 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. The Company does not expect the adoption of SFAS No. 145 will have a material impact on its results of operations or financial position.

- 13 -

STOREAGE NETWORKING TECHNOLOGIES LTD.
AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands

NOTE 2:-	SIGNIFICANT ACCOUNTING POLICIES (Cont.)

		In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”). SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized and measured, initially at fair value, only when the liability is incurred; therefore, nullifying Emerging Issues Task Force Issue No. 94-3, “Liability Recognition for Certain Employee Termination benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)” (“EITF 94-3”) that required a liability for an exit cost to be recognized at the date of an entity’s commitment to an exit plan. The adoption of SFAS 146 is expected to result in delayed recognition for certain types of costs as compared to the provisions of EITF 94-3, especially for facility closure costs. The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The Company’s management does not expect the adoption of SFAS 146 will have a material impact on its consolidated financial statements.

NOTE 3:-	OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES

	December 31,

	2003		2002


Government authorities	$	81	$	19
Prepaid expenses		61		86
Current maturities of car lease deposits		41		-
Other		72		21


	$	255	$	126

NOTE 4:-

INVENTORIES

Raw materials, parts and supplies	$	40	$	65
Finished products		117		113


	$	157	$	178

NOTE 5:-	LOAN TO AN EMPLOYEE

	On March 19, 2001, the Company granted to a key employee a loan of $ 110, under the following terms:

	a.	The principal is repayable on the earlier of the following events: consummation of an IPO, sale of all or substantially all of the Company’s property and assets, merger or consolidation of the Company or five years from the grant date of the loan.

	b.	The loan bears interest at an annual rate of 3.5% and the principal amount will be linked to the U.S. dollar. The accrued interest is repayable upon the repayment of the principal of the loan.

- 14 -

STOREAGE NETWORKING TECHNOLOGIES LTD.
AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands

NOTE 6:-

PROPERTY AND EQUIPMENT, NET

	December 31,

	2003		2002

Cost:
Computers and peripheral equipment	$	1,819	$	1,616
Office furniture		215		222
Motor vehicles		239		281
Leasehold improvements		26		21


		2,299		2,140
Accumulated depreciation		1,557		1,035


Depreciated cost	$	742	$	1,105

NOTE 7:-	COMMITMENTS AND CONTINGENT LIABILITIES

	a.	Royalty commitments:

		The Company participated in programs sponsored by the Israeli Government for the support of research and development activities. The Company is committed to pay royalties to the Israeli Ministry of Industry and Trade (“the OCS”), amounting to 3%-5% of the proceeds from sales of products in which the Government participated in their research and development by way of grants, up to 100% of the grants received, linked to the U.S. dollar. The commitment is determined on a product-by-product basis, in an amount not to exceed the total of the grants received (linked to the U.S. dollar plus interest at the rate of LIBOR).

		Royalties paid or accrued through the year ended December 31, 2003 amounted to $ 237.

		As of December 31, 2003, the Company has an outstanding contingent obligation to pay royalties in the amount of $ 1,882.

	b.	Lease commitments:

		The Company and its subsidiary lease their facilities under various operating lease agreements, which expire on various dates, the latest of which is in 2006. The minimum rental payments under non-cancelable operating leases are as follows:

		Year ended December 31,


		2004	$	290
		2005		147
		2006		63


			$	500

- 15 -

STOREAGE NETWORKING TECHNOLOGIES LTD.
AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 7:-	COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)

		Total rent expenses for the years ended December 31, 2003, 2002 and 2001, were approximately $ 299, $ 313 and $ 168, respectively.

	c.	Charges and guarantees:

		The Company obtained a bank guarantee in the amount of $ 87 in order to secure its lease obligations.

NOTE 8:-	SHAREHOLDERS’ EQUITY

	a.	The rights conferred by the Company’s shares:

		1.	The Ordinary shares confer upon the holders the right to receive notice, to participate and vote in general meetings of the Company and the right to receive dividends, if declared.

		2.	The Preferred shares (“A” and “B”) have the same rights as the Ordinary shares. In addition, the shares are convertible into Ordinary shares, have an aggregate preference in liquidation of $ 34,200 as of December 31, 2003, dividend preference, anti-dilution rights, preemptive rights, tag-along rights and preference in voting on certain matters. The Preferred shares are convertible, at the holders’ option, or upon an IPO of the Company, into Ordinary shares on a one-for-one basis.

	b.	Stock option plans:

		Under the Company’s Stock Option Plans (the “Plans”), options may be granted to officers, directors, employees and consultants of the Company or its subsidiary.

		Pursuant to the Plans, the Company reserved for issuance 4,631,545 Ordinary shares. As of December 31, 2003, an aggregate of 214,015 Ordinary shares of the Company are still available for future grant.

		Each option granted under the Plans is exercisable until the earlier of ten years from the date of the grant of the option or the expiration dates of the respective option plans. The options vest primarily over four years. Any options, which are forfeited or cancelled before expiration, become available for future grants.

- 16 -

STOREAGE NETWORKING TECHNOLOGIES LTD.
AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 8:-	SHAREHOLDERS’ EQUITY (Cont.)

		A summary of the Company’s stock option activity in 2003, 2002 and 2001:

	Year ended December 31,

	2003					2002					2001

	Amount of options			Weighted average exercise price		Amount of options			Weighted average exercise price		Amount of options			Weighted average exercise price

				$					$					$

Outstanding at beginning of year		4,064,280			0.48		3,869,780			0.46		1,877,780			0.15

Granted		445,500			0.75		330,500			0.75		2,023,000			0.75
Forfeited		(232,250	)		0.75		(136,000	)		0.75		(31,000	)		0.75


Outstanding at December 31, 2003		4,277,530			0.49		4,064,280			0.48		3,869,780			0.46


Exercisable options at December 31, 2003		2,736,030			0.34		1,811,585			0.28		894,390			0.13

The options outstanding as of December 31, 2003, have been separated into certain exercise prices as follows:

exercise price		Options Outstanding as of December 31, 2003		Weighted average remaining contractual life		Weighted average exercise price		Options Exercisable as of December 31, 2003		Weighted average exercise price of options exercisable

$				Years		$				$

	0.10		1,703,780		6.12		0.1		1,703,780		0.1
	0.5		30,000		6.46		0.5		22,500		0.5
	0.75		2,543,750		8.02		0.75		1,009,750		0.75


			4,277,530		7.25		0.49		2,736,030		0.34

- 17 -

STOREAGE NETWORKING TECHNOLOGIES LTD.
AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 8:-	SHAREHOLDERS’ EQUITY (Cont.)

	c.	Options granted to consultants:

		1.	The Company’s outstanding options to consultants as of December 31, 2003, are as follows:

Issuance date

Options for
Ordinary shares

Exercise price
per share

Options
exercisable

June 2001

*) 60,000

0.75

30,000

August 2003

*) 55,000

0.75

*) The options vest over four years

	2.	The Company had accounted for its options to consultants under the fair value method of SFAS No. 123 and EITF 96-18. The fair value for these options was estimated using a Black-Scholes Option-Pricing Model with the following weighted-average assumptions for the years ended December 31, 2003, 2002 and 2001: risk-free interest rate of 3%, 3% and 3.5% for the years ended December 31, 2003, 2002 and 2001, respectively, dividend yields of 0% for each year, expected volatility of 0.1 for each year, and a contractual expected life of the warrants of approximately 10, 10 and 9 years, respectively.

	3.	Regarding the options granted to consultants, the Company did not record compensation expenses for the years ended December 31, 2003 and 2002, due to immateriality of compensation amounts.

d.	Warrants issued to investors:

	During December 2000 and January 2001, the Company issued to certain investors warrants to purchase 2,875,006 Preferred B shares at a price of $ 4.93 per share. The warrants are exercisable until the earlier of:

	1.	The Initial Public Offering of the Company’s shares for net proceeds of more than $ 30 thousand reflecting a pre-offering valuation of the Company of more than $ 150 thousand.

	2.	The consummation of a merger, reorganization, acquisition, or sale of all or substantially all of the assets of the Company in which its current shareholders hold less than 50% of the voting power of the surviving entity and which reflects a pre-transaction valuation of more than $ 200 thousand.

	3.	Three years from the closing date of the Preferred B share purchase agreement.

	Subsequent to the balance sheet date, the aforementioned warrants expired.

e.	Dividends:

	The Company does not intend to pay cash dividends in the foreseeable future.

- 18 -

STOREAGE NETWORKING TECHNOLOGIES LTD.
AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands, except share and per share data

NOTE 9:-	INCOME TAXES

	a.	Measurement of taxable income under the Income Tax (Inflationary Adjustments) Law, 1985:

		Results for tax purposes are measured in terms of earnings in NIS after certain adjustments for increases in the Israeli Consumers Price Index (“CPI”). As explained in Note 2b, the financial statements are measured in U.S. dollars. The difference between the annual change in the Israeli CPI and in the NIS/dollar exchange rate causes a further difference between taxable income and the income before taxes shown in the financial statements. In accordance with paragraph 9(f) of SFAS No. 109, the Company has not provided deferred income taxes on the difference between the functional currency and the tax bases of assets and liabilities.

	b.	Tax benefits under the Law for the Encouragement of Capital Investments, 1959:

		The Company has been granted an “approved enterprise” status under the above law and has elected to enjoy the “alternative system of benefits” - waiver of grants in return to tax exemption. Income derived from approved enterprises is tax exempt for a period of two years out of 10-year period of benefits (based on the percentage of foreign ownership in each taxable year). Income derived during the remaining years of benefits is entitled to reduction in tax rates. The period of tax benefits is subject to a time limit of the earlier of 12 years from commencement of production or 14 years from the grant of approval. The period of benefits commences with the first year in which the Company has realized a taxable income. The period of benefits relating to the approved enterprise will expire in the years 2011 through 2013.

		In June 2002, the Company submitted an expansion request for an “Approved Enterprise” regarding its production facilities in Nesher. The income derived from this “Approved Enterprise” will be tax-exempt for a period of two years out of 10-year period of benefits. The ten years period of benefits will commence with the first year in which the Company earns taxable income. The expansion request has been approved in September 2003.

		The entitlement to the above benefits is conditional upon the Company’s fulfilling the conditions stipulated by the above law, regulations published thereunder and the instruments of approval for the specific investments in “approved enterprises”. In the event of failure to comply with these conditions, the benefits may be canceled and the Company may be required to refund the amount of the benefits, in whole or in part, including interest.

		If the tax-exempt income attributable to the approved enterprise is distributed in a manner other than in the complete liquidation of the Company, it would be taxed at the corporate tax rate applicable to such profits as if the Company had not chosen the alternative system of benefits (currently - 25%).

		Income deriving from other than “approval enterprise” as mentioned above is taxed at the regular rate of 36%.

- 19 -

STOREAGE NETWORKING TECHNOLOGIES LTD.
AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands

NOTE 9:-	INCOME TAXES (Cont.)

	c.	Deferred taxes:

		Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

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

	December 31,

	2003			2002


Provision for vacation and severance pay	$	103		$	204
Amortization		41			113
Loss carryforward		6,103			3,751


Net deferred tax asset before valuation allowance		6,247			4,068
Valuation allowance		(6,247	)		(4,068	)


Net deferred tax assets	$	-		$	-

		Management currently believes that since the Company and its subsidiary have a history of losses it is more likely than not that the deferred tax regarding the loss carryforwards and other temporary differences will not be realized in the foreseeable future.

		The main reconciling item between the statutory tax rate of the Company and the effective tax rate are the non-recognition of tax benefits resulted from the Company’s accumulated net operating losses carryforward due to the uncertainty of the realization of such tax benefits and the effect of the Approved Enterprise.

	d.	Net operating losses carryforward:

		The Israeli company has accumulated operating losses for tax purposes as of December 31, 2003, in the amount of approximately $ 8,953, which may be carried forward and offset against taxable income in the future for an indefinite period.

		As of December 31, 2003, the U.S. subsidiary had approximately $ 7,750 in federal net operating loss carryforwards for income tax purposes, which can be carried forward and offset against taxable income for 20 years and expire until 2023.

		Utilization of U.S. net operating losses may be subject to substantial annual limitation, due to the “change in ownership” provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses before utilization.

- 20 -

STOREAGE NETWORKING TECHNOLOGIES LTD.
AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands

NOTE 10:-	SEGMENT, CUSTOMERS AND GEOGRAPHIC INFORMATION

	a.	Summary information about geographical areas:

		The Company operates in one industry segment. Operations in Israel include research and development, selling and marketing. Operations in the United States include selling and marketing. The Company has adopted SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information”.

		The following is a summary of operations within geographic areas based on customer’s location.

	Year ended December 31,

	2003		2002		2001

Revenues from sales to unaffiliated customers:
U.S.A.	$	778	$	264	$	508
Europe		999		335		145
Others		167		123		30


	$	1,944	$	722	$	683


Long-lived assets, by geographic areas:

Israel	$	610	$	865	$	839
United States		132		240		247


	$	742	$	1,105	$	1,086

Major customer data as percentage of total revenues:

	Year ended December 31,

	2003			2002			2001


Customer A		1	%		17	%		31	%
Customer B		-			12	%		-
Customer C		11	%		10	%		15	%

- 21 -

STOREAGE NETWORKING TECHNOLOGIES LTD.
AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands

NOTE 11:-	RELATED PARTY

	The balance with related party is generally paid on a monthly basis for certain labor costs coverage. As of the December 31, 2003, the outstanding balance with Intelligent Information Systems Ltd. (“I.I.S.”) for administration services amounted to $ 5.

	Transactions with I.I.S:

	Year ended December 31,

	2003		2002		2001

Administration services	$	48	$	44	$	112
Research and development costs		-		80		250


	$	48	$	124	$	362

- - - - - - - - - - - - - - -

- 22 -

Enargis Storage Solutions Ltd.

Financial Statements as of December 31, 2003

Enargis Storage Solutions Ltd.

Financial Statements December 31, 2003






CONTENTS	Page
Report of Independent Public Accountants	2
Balance sheet	3
Statement of operations	4
Statement of Changes in Shareholders' Equity	5
Statement of Cash Flows	6
Notes to the financial statements	7-12

Chaikin, Cohen, Rubin & Gilboa

Atidim Technology Park, Bldg. 4,
P.O.B. 58143 Tel-Aviv 61580, Israel
Tel: 03-6489858 Fax: 972-3-6489946
E-mail: accounting@ccrcpa.co.il

Certified Public Accountants (Isr.)

To The Shareholders of
Enargis Storage Solutions Ltd.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

We have audited the accompanying balance sheet of Enargis Storage Solutions Ltd., (“the Company”) as of December 31, 2003 and the related statement of operation, changes in shareholders’ equity and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2003 and the results of its operations, changes in shareholders’ equity and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States.

Chaikin, Cohen, Rubin & Gilboa
Certified Public Accountants (Isr.)

Tel-Aviv, June 3, 2004


The accompanying notes are an integral part of the financial statements

Page 2

Enargis Storage Solutions Ltd.

Balance Sheet

		December 31,
		2003
	Note	US$


ASSETS

Current Assets

Cash and cash equivalents			732
Government institutions			3,350

			4,082

Severance pay fund	5		3,234

Property and equipment, net	3		16,433

			23,749

LIABILITIES AND CAPITAL DEFICIENCY

Current Liabilities

Credit from bank			5,077
Trade payables			7,486
Other payables and accrued expenses	4		208,104

			220,667

Accrued severance pay	5		7,916

Capital deficiency	6

Ordinary shares			371
Ordinary shares of NIS 0.1 par value:
Authorized: 10,000,000 at December 31, 2003
Issued and outstanding: 16,000 at December 31, 2003
Additional paid in capital			20,149
Accumulated deficit			(225,354	)

			(204,834	)

			23,749

Approved by the Board of Directors on June 3, 2004.

——————————————
Shavit Danny - Director

——————————————
Hartman Robi - Chairman


The accompanying notes are an integral part of the financial statements

Page 3

Enargis Storage Solutions Ltd

Statement of operation

		Year ended December 31,
		2003
	Note	US$


Revenues			190,039


Cost of revenues			105,148

Gross profit			84,891


Research and development			188,755

General and administrative			120,472

			309,227


Operating loss			(224,336	)

Financial expenses, net			1,018

Net loss			(225,354	)


The accompanying notes are an integral part of the financial statements

Page 4

Enargis Storage Solutions Ltd.

Statement of Changes in Shareholders' Equity

		Share capital		Additional paid in capital (*)		Accumulated deficit			Total shareholders deficiency
		US$		US$		US$			US$



Issuance of shares	16,000		371		20,149		-			20,520

Net loss for the year	-		-		-		(225,354	)		(225,354	)

Balance as at December 31, 2003	16,000		371		20,149		(225,354	)		(204,834	)

(*)	The investment in the Company amounting to $20,149, was based on the computers and related equipment-carrying book value which were transferred to the Company by IIS Intelligent Information Systems Ltd. at the closing date of the transaction.


The accompanying notes are an integral part of the financial statements

Page 5

Enargis Storage Solutions Ltd.

Statements of Cash Flows

	Year ended December 31,
	2003
	US$


Cash flows from operating activities

Net loss		(225,354	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		14,735
Provision for severance pay, net		4,682
Changes in operating assets and liabilities:
Increase in receivables		(3,350	)
Increase in payables		215,590

Net cash provided by operating activities		6,303

Cash flows from investing activities

Purchase of fixed assets		(11,019	)

Net cash used in investing activities		(11,019	)

Cash flows from financing activities

Issuance of shares		371
Increase in short term bank credits, net		5,077

Net cash provided by financing activities		5,448

Increase in cash and cash equivalents		732

Cash and cash equivalents at the beginning of the year		-

Cash and cash equivalents at the end of the year		732

Supplemental non cash investing and financing activities:

On March 2003, the Company gained computer and related equipment in the amount of $20,149 as a part of I.I.S Intelligent Information System Ltd. investment in the Company – see Note 1.


The accompanying notes are an integral part of the financial statements

Page 6

Enargis Storage Solutions Ltd.

Notes to Financial Statements

NOTE 1 – GENERAL

The Company was founded and commenced its operation on January 2003.

The Company designs, develops and provides enterprise storage solutions for the Internet Small Computer Systems Interface (hereinafter called “iSCSI”). The Company’s products are customized software implementation projects for the development and integration of iSCSI interface into existing storage devices and a family of comprehensive IP storage testing tools, for iSCSI protocol analysis of SAN devices.

As of January 1,2003 the Company purchased the iSCSI related activities of I.I.S Intelligent Information Systems Ltd. in consideration of 25% of the Company voting and profits rights. During the period from January 2003 to March 31, 2003 the Company’s operations were funded by a related party (West End Technology Investments Ltd.).

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES

The financial statements have been prepared in accordance with generally accepted accounting principles in United States ("U.S. GAAP").

Use of estimates

Reporting currency

The financial statements of the Company have been prepared in U.S. dollars, since the majority of the Company’s revenues is generated in dollars. Additionally, the management believes that the dollar is the primary currency of the economic environment in which the Company has operated.

Transactions and balances originally denominated in dollars are presented in their original amounts. Transactions and balances in other currencies are remeasured into dollars in accordance with the principles set forth in Statement No. 52 of the Financial Accounting Standards Board of the United States (“FASB”).

Exchange gains and losses from the aforementioned remeasurement are reflected in the statement of operations. The representative rate of exchange at December 31, 2003 was $1 = 4.379 New Israeli Shekels (“NIS”). (At January 1, 2003 $ 1=NIS4.737).

Cash equivalents

All highly liquid investments with an original maturity of three months or less are considered cash equivalents.




Page 7

Enargis Storage Solutions Ltd

Notes to Financial Statements

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES (continued)

Property and equipment

			%




Computers and software				33
Office furniture and equipment				6-10
Motor vehicles				15

Revenue recognition

Revenue from sales of software products is generally recognized upon delivery or upon customer acceptance (if required), provided the price is fixed or determinable, collectibility is reasonably assured, future obligation of the Company are considered insignificant and the cost of such obligations can be reliably estimated. Sales of products that do not initially meet the criteria for recognition are recognized at the date when all criteria are met. Service revenues are recognized ratably over the contractual period or as services are performed.

Customers’deposits and other payments received prior to sales recognition are included in advances from customers and deferred revenues in the balance sheets.

Research and development costs

Research and development expenses are charged to income as incurred.

Income taxes

Deferred taxes are determined utilizing the asset and liability method based on the estimated future tax effects of differences between the financial accounting and tax bases of assets and liabilities under the applicable tax laws. Deferred income tax provisions and benefits are based on the changes in the deferred tax asset or tax liability from period to period. Valuation allowances are provided for deferred tax assets when it is more likely than not that all or a portion of the deferred tax assets will not be realized.




Page 8

Enargis Storage Solutions Ltd

Notes to Financial Statements

NOTE 3 – PROPERTY AND EQUIPMENT, NET

	December 31,
	2003
	US$


Cost:
Office furniture and equipment		1,015
Computers and software		19,930
Motor vehicles		10,223

		31,168

Accumulated depreciation:
Office furniture and equipment		53
Computers and software		13,911
Motor vehicles		771

		14,735

Depreciated cost		16,433

Depreciation expenses for the year ended December 31, 2003 amounting to approximately $14,735.

Depreciation expenses of the purchased from related party was calculated at annual rates from the original cost of the related party.

NOTE 4 – OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES

	December 31,
	2003
	US$


Employees and payroll accruals		27,222
Government authorities		2,613
Related party (1)		30,144
Accrued expenses (2)		148,125

		208,104

(1)

As of May 31, 2004 Enargis owes West End, a related party, in excess of approximately $115,000 with respect to shareholder loans. These interest-free loans are secured by charges on the assets of Enargis and are subject to repayment on demand.

(2)

As of the incorporation of the Company,Mr. Hartman and Mr. Shavit, our CEO and CTO respectively (both shareholders of the company that hold 75% of the company shares), did not collect any compensation nor payroll in regards to their efforts in the Company and agreed that this compensation will be paid only from receipt of proceeds from Investment in the Company or future earnings. As of December 31, 2003 the amount of compensation due but unpaid to our officers according to this arrangement is approximately $148,000.




Page 9

Enargis Storage Solutions Ltd

Notes to Financial Statements

NOTE 5 – SEVERANCE PAY

The Company’s severance pay liability based upon the employees’ years of service and the current monthly salary is mostly covered by insurance policies and pension funds.

The amounts accrued and the portion funded by the insurance policies and pension funds are reflected in the financial statements as follows:

	December 31,
	2003
	US$


Liability for severance pay		7,916
Less - amounts funded (presented among "non-current assets")		3,234

		4,682

The Company may only utilize the insurance policies for the purpose of disbursement of severance pay.

NOTE 6 – SHARE CAPITAL

Balance as of December 31, 2003 -

			Number of shares




Authorized :
Ordinary shares of NIS 0.01 par value				10,000,000

Issued and fully paid up
Ordinary shares of NIS 0.01 par value				16,000




Page 10

Enargis Storage Solutions Ltd

Notes to Financial Statements

NOTE 7 — TRANSACTION WITH RELATED PARTIES

	Year ended December 31,
	2003
	US$


1
a. Revenue		18,020

b. Expenses:
Rental fees, net (1)		19,132
Participation in salary expenses		2,774
Salary expenses (2)		148,125

2. Purchase of equipment's		20,149
Purchase of vehicle		10,223

(1)

The Company’s facilities in Israel are rented under a lease agreement with a related party. The rental payment under this agreement is $2,890 per month. Another related party is participating 35% in this rental payment, thus decreasing the net cost of $1,011.

(2)

See Note 4(2).

NOTE 8 – INCOME TAXES

The Company is subject to the Income Tax Law (Inflationary Adjustments), 1985, measuring income on the basis of changes in the Israeli Consumer Price Index.

The Company has a carry forward loss and deductions of approximately $225,354 for tax purpose as of December 31, 2003. Since the recoverability of this loss is uncertain, no income tax benefits have been recorded in respect thereof.




Page 11

Enargis Storage Solutions Ltd

Notes to Financial Statements

NOTE 9 – GEOGRAPHIC INFORMATION

The Company operates in one reportable segment (see Note 1 for a brief description of the Company’s business).

The following presents total revenues on the basis of the location of the end customers for the year ended December 31, 2003 and long-lived assets as of December 31, 2003:

	Year ended December 31,
	2003
	US$


Sales to customers:

United States		122,070
Israel		67,969

		190,039

Long-lived assets:

Israel		16,433




Page 12

SIGNATURES

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

	I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
	(Registrant)


	By:	/s/ Robi Hartman

		Robi Hartman, Chief Executive Officer

Date: June 21, 2004

Index to Exhibits:

Exhibit No.:

1.1		Memorandum of Association of the Company.*
1.2		Articles of Association of the Company, Amended and Restated as of November 19, 2000.**
4.1		Purchase and Assignment agreement between the Company and Eastek Embedded Systems (Meitav) Ltd., dated November 30, 2000.**

4.3		Summary English Translation from the original Hebrew of a Lease Agreement entered into between the Company and West End Technology Investments Ltd., for office space located at 33 Jabotinsky Street, Ramat Gan, Israel, dated January 30, 2001.**
4.4		Shareholders’ Rights Agreement dated as of January 18, 2001 between the Company, StoreAge and certain investors.**
4.5		Research & Development Subcontracting Agreement effective as of October 15, 2000, between the Company and StoreAge Networking Technologies Ltd.***
8.1		List of significant subsidiaries of the Company.
12.1		Certification by Chief Financial Officer and Acting Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
14.1		Consent of Kost Forer and Gabbay, a Member of Ernst & Young International.

Exhibit 8.1

Significant Subsidiaries of I.I.S. Intelligent Information Systems Limited

List of Significant Subsidiaries	Jurisdiction of Incorporation or Organization	Business Name


None

Exhibit 12.1

CERTFICATION

Certification by Principal Executive Officer and Principal Accounting Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Robi Hartman, certify that:

1.	I have reviewed this Annual Report on Form 20-F of I.I.S. Intelligent Information Systems Limited (the “Registrant”);

2.	Based on my knowledge, this Annual Report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual Report;

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

4.	The Registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Registrant 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 Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Annual Report is being prepared;

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

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

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

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

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

6.

By:	/S/ Robi Hartman


	Robi Hartman,

	Chief Executive Officer and Acting Chief Financial Officer

Date: June 21, 2004

Exhibit 14.1

CONSENT OF INDEPENDENT AUDITORS

We consent to the incorporation by reference in the Registration Statement on Form S-8 (Registration No. 333-8240, 333-12764 and 333-59548) of our report dated March 18, 2004, with respect to the consolidated financial statements of I.I.S. Intelligent Information Systems Ltd. included in this Annual Report on Form 20-F for the year ended December 31, 2003.



	/s/ KOST FORER and GABBAY
	A Member of Ernst & Young Global

Tel Aviv, Israel
June 22, 2004

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I.I.S. INTELLIGENT INFORMATION SYSTEMS LTD. AND ITS SUBSIDIARY

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2003

IN U.S. DOLLARS

INDEX

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Shareholders of

I.I.S. INTELLIGENT INFORMATION SYSTEMS LTD.

NOTE 1:- GENERAL

NOTE 1:- GENERAL (Cont.)

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

NOTE 3:- PROPERTY AND EQUIPMENT

NOTE 4:- OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES

NOTE 5:- FINANCING ARRANGEMENTS

NOTE 5:- FINANCING ARRANGEMENTS (Cont.)

NOTE 6:- COMMITMENTS AND CONTINGENT LIABILITIES

NOTE 6:- COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)

NOTE 7:- SHARE CAPITAL

NOTE 7:- SHARE CAPITAL (Cont.)

NOTE 7:- SHARE CAPITAL (Cont.)

NOTE 8:- INCOME TAXES

NOTE 8:- INCOME TAXES (Cont.)

NOTE 9:- GEOGRAPHIC INFORMATION

NOTE 10:- SELECTED STATEMENTS OF OPERATIONS DATA

Enargis Storage Solutions Ltd.

Financial Statements as of December 31, 2003

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

Supplemental non cash investing and financing activities:

NOTE 1 – GENERAL

NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES

NOTE 3 – PROPERTY AND EQUIPMENT, NET

NOTE 4 – OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES

NOTE 5 – SEVERANCE PAY

NOTE 6 – SHARE CAPITAL

NOTE 7 — TRANSACTION WITH RELATED PARTIES

NOTE 8 – INCOME TAXES

NOTE 9 – GEOGRAPHIC INFORMATION

I.I.S. INTELLIGENT INFORMATION SYSTEMS LTD.
AND ITS SUBSIDIARY