Domestic and international stock markets often experience extreme price and volume fluctuations. Market fluctuations, as well as general political and economic conditions, such as a recession or interest rate or currency rate fluctuations or political events or hostilities in or surrounding Israel, could adversely affect the market price of our ordinary shares.

          In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and divert management’s attention and resources.

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

          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 consists of more than one class of shares, the approval of each class is also required.  Further, if the company was incorporated before February 1, 2000, as we were, the approval of the merger requires a majority of 75% of the shareholders present and voting at a meeting.  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 do not apply if the acquisition is made by way of a merger.  Regulations promulgated under the Companies Law provide that, generally, these provisions do not apply to companies whose shares are listed for trading outside of Israel.  The requirements of Israeli corporate law generally make these forms of acquisition significantly more difficult than under United States corporate laws.

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          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 body of case law has not yet developed with respect to the Israeli Companies Law.  Until this happens, uncertainties will exist regarding its interpretation.

          Finally, Israeli tax law treats some acquisitions, particularly stock-for-stock swaps between an Israeli company and a foreign company, less favorably than United States tax law.  Israeli tax law may, for instance, subject a shareholder who exchanges his or her shares in us for shares in a foreign corporation to immediate taxation.

          These provisions of Israeli corporate and tax law and the uncertainties surrounding such law may have the effect of delaying, preventing or making more difficult a merger or acquisition involving our company.  This could prevent a change of control in our company and depress the market price of our ordinary shares that might otherwise rise as a result of such change of control.

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

ITEM 4.          INFORMATION ON THE COMPANY

A.        History and Development of the Company

          Our legal and commercial name is RoboGroup T.E.K. Ltd.  We were incorporated under the laws of the State of Israel in 1982 as Robotec (G.A.L.) Industrial Robotic Technology Ltd. for an indefinite term.  In 1983 we changed our name to Eshed Robotec (1982) Ltd.  On May 15, 2001, we changed our name to RoboGroup T.E.K. Ltd.  Our registered office and principal executive offices are located at 13 Hamelacha Street, Afeq Industrial Park, Rosh Ha’Ayin 48091 Israel and our telephone number is 972-3-9004111.  Our address on the internet is http://www.robo-group.com.  The information on our website is not incorporated by reference into this annual report.

          We operate in three business sectors.The first sector consists of our traditional business activity, the educational area, or the Educational Sector. This sector is primarily engaged in the design, manufacture and sale of products and solutions for the educational markets in the fields of technology and science.  The products include robots, products for teaching state-of-the-art manufacturing technologies, computer integrated manufacturing, or CIM, products which are used for demonstration and study of advanced integration and manufacturing principles, training systems for pneumatics and hydraulics, programmable logic control, or PLC, sensor training and machine vision systems designed for educational applications, or ROBOTVISION.  In addition, this sector markets science and technology products of third parties. Since the third quarter of 2002, our e-learning activities were integrated into the Educational Sector.

          In 2001 and 2002, we took organizational and marketing measures aimed at combining the activities of our U.S. subsidiary, Intelitek Inc., or Intelitek, with our activities in Israel and streamlining its marketing and management procedures.  At the same time, Intelitek began to develop an infrastructure for the world-wide marketing and sales of its Light Machines product line, that was purchased in 2000.

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          During 2002, our Educational Sector continued to implement and execute a cost cutting plan that was initiated in the last quarter of 2001. The plan covered all the entities in the sector, including Intelitek and Computras Computerizes Training Systems Ltd., or Computras. The plan was fully implemented in accordance with the work plan for 2002.

          In April 2003, our board of directors decided on a change in the management of the Educational Sector.  Since May 2003, the Educational Sector is managed by Mr. Rafael Aravot, our CEO, and Messrs. Haim Schleifer and Noam Kra-Oz, co-general managers, who will continue to perform their other duties as officers of our company. The former co-manager Mr. Eldad Chereshnia will conclude his employment with us in the next few months. The continued relationship and contribution of Mr. Moshe Turner, the former co-manager of the educational sector is being mutually examined.

          In April 2002, we entered into an approximately $2 million contract to provide training systems for advanced production technologies to a vocational school network in South America. This was a follow-on transaction to a transaction completed several years ago, whereby systems were supplied to 18 schools in the same school network. The delivery of the systems was completed in the third quarter of 2002.

          In December 2001, we entered into an over  $4 million contract to provide an e-learning training system. The e-learning system that is being developed under this contract includes content packages relating to our principal field of expertise in the development and production of technology training systems. We expect to complete this project in the next few months, and the developed products are expected to be used for future e-learning projects. The first delivery in the project was made in the third quarter of 2002 and we started to recognize revenues from this project at the same time. An additional delivery was made in the fourth quarter of 2002.

           In December 2002, we entered into an agreement with Mentergy Ltd. for the acquisition of assets relating to its TrainNet activity, an interactive distance learning product via satellite or the internet.  Pursuant to the agreement, we acquired, among other things, proprietary rights to the software, the right to use the name TrainNet and production files and engineering documentation for the product. We consider this transaction as an additional step in the expansion of our activities in the growing field of distance learning and e-learning.  We believe that the combination of the TrainNet product and products developed by us will provide our customers with unique solutions for distance learning.  In the first two quarters of 2003, we signed several contracts with customers with respect to the TrainNet product.

          The second sector consists of our subsidiary YET, which is engaged in the development and manufacture of motion control products for the industrial market. In 2000, YEC entered into a five-year service agreement with us, pursuant to which YEC will pay us service and management fees. The yearly amount to be paid for such service and management fees will be determined in an annual agreement.

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          In January 2002 we entered into an agreement with YEC according to which YEC paid us approximately NIS 1.2 million (approximately $270,000) for services and management fees in 2002. In January 2003 we entered into an agreement with YET for the year 2003 according to which YET will pay us approximately NIS 0.9 million (approximately $190,000) for services and management fees.

          In 2002, YET delivered approximately $4.2 million of products and services to YEC.  The 2002 working plan approved by the YET Board of Directors forecasted a pre-tax profit of approximately $1.75 million. YET’s pre-tax profits for the year 2002 amounted to approximately $1.7 million.

           In mid 2001, YET’s board of directors reached a resolution whereby YET would start to develop new independent marketing channels for the sale of its products and develop products that will be sold under the YET brand name.  In 2002 the basic development of the XtraDrive, an advanced server driver, was completed and YET continued with the advanced stages of its development. The XtraDrive will be sold under the YET brand name. 

          In 2002, YET initiated marketing activities in Europe and the U.S. in order to establish a presence in these markets and entered into negotiations with a European company and U.S. companies to establish private label relationships. Although YEC was suppose to help in establishing marketing channels for YET, due to fundamental changes in YEC’s marketing system in Europe its progress has been delayed.  In early 2003, YET began to seek independent distributors to market its products in Europe. At the same time YET realized that YEC would not distribute its products in the U.S., and that it would have to establish an independent marketing network there. Action on this matter has been started.  During this period YET continued its efforts to market YEC’s products in Israel. In 2002, YET made preliminary sales (in immaterial amounts) of the XtraDrive product to several clients in Europe and in the U.S., as well as preliminary sales (also in immaterial amounts) of the YEC product line in Israel.

          The third business sector we operate in is comprised of our start-up company MemCall. MemCall is engaged in the development of a new search technology which may potentially reduce the time for locating and retrieving data in computers and communications networks. The result of the new technology is expected to be a development of electronic semiconductor chips.

           In 2002, MemCall continued its efforts to raise capital from third parties. Due to the difficult conditions prevailing in the global networking market, MemCall's market potential has been significantly reduced.  Since the condition of the capital markets is still weak, MemCall’s management is unable to estimate if, or under what conditions, MemCall will be able to raise additional capital for its operations.

          In the beginning of 2001, our Board of Directors established two milestones with respect to completing an investment of $2.5 million in MemCall. In November 2001, our Board of Directors acknowledged that MemCall had met the two milestones.

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          In May 2002, our Board of Directors approved an additional $1 million investment in MemCall, subject to several new milestones being met by the end of 2002. In January 2003, our Board of Directors approved an additional investment of $0.75 million. The funds will be forwarded in accordance with MemCall’s progress toward the milestones that were determined. The additional financing will at our discretion either be repaid by MemCall on specified dates or, alternatively, converted into additional share capital in MemCall. Accordingly, our investment in MemCall is expected to total approximately $4.25 million.

          Our investment in MemCall in 2002 amounted to approximately NIS 7.6 million ($1.6 million) before the contribution from the Office of the Chief Scientist of the Israeli Ministry of Industry and Trade, or the Chief Scientist. Our aggregate investment in MemCall, as of December 31, 2002, amounted to approximately $3.3 million.

          In addition to its decision to increase our company’s investment in MemCall, our Board of Directors determined, in January 2003, to: (a) transfer MemCall’s headquarters to the State of California where, we believe, the largest concentration of MemCall’s target market is located; (b) change MemCall’s business model, while emphasizing strategic alliances with leading manufacturers/marketers in the global silicon market; (c) appoint Mr. Bill Eichen, a California resident, as CEO and a director of MemCall; and (d) implement a reorganization plan, which includes staff reductions. MemCall will continue to develop its technology and intellectual assets.

          MemCall’s retiring CEO, Mr. Alon Shacham, will serve as an outside consultant to the company. Mr. Amnon Yacoby was appointed as Chairman of MemCall’s Board of Directors succeeding Mr. Rafael Aravot.

           In the third quarter of 2002, MemCall received the approval of the Office of the Chief Scientist for a grant in the amount of approximately NIS 4.6 million, which constitutes 50% of a total budget of approximately NIS 9.2 million that was approved by the Chief Scientist pursuant to a development plan that was submitted by Memcall under the Israeli Research and Development Law. Although the approved budget was for the period January through December 2002, MemCall received the Chief Scientist’s approval to extend the period of this budget until the end of March 2003.

          In the third quarter of 2002, a third-party contractor delivered a preliminary quantity of test chips to MemCall. The test chip is a piece of silicon, designed to test basic functions in the planning of MemCall’s first planned product and is not a product in itself.  The examination process of the test chips revealed significant problems with the third-party contractor’s production process. The result of these problems was that only a certain percentage of the functions that should have been tested were actually tested.

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B.          Business Overview

Products

          The products of our Educational Sector are targeted primarily at the educational and industrial training markets.

Technology for Engineering and Automated Manufacturing (TEAM)

          TEAM (formerly marketed as AMT), is a comprehensive and effective solution for preparing students for further education and careers in engineering, manufacturing and industry. We have been developing this product line which incorporates a series of automation and manufacturing technology systems for manufacturing and pre-engineering training since 1997.

          TEAM was designed to meet the needs of U.S. and Canadian educational systems. It is a curriculum-driven, project-based program that challenges students to step through iterations of the design process and develop appropriate solutions to emerging problems by using automated manufacturing technologies as resources.  Students are actively engaged in authentic applications and experi­ences that integrate learning across academic disciplines – including hands-on math, science, technology and problem-solving skills.  The program fosters creativity and discovery, and promotes communication and collaboration as students work in a team environment.

          TEAM is a comprehensive educational program that was designed to give educators effective tools for preparing students for careers in engineering, manufacturing and industrial technology. It includes, tekLINKs (activity-based learning modules), tekSURF (multimedia enhancements) and tekSCOPE (lab management software). TEAM covers a wide range of modern manufacturing and engineering technologies, such as robotics and automated welding, sensors, machine vision, quality control, pneumatics and hydraulics, programmable logic controllers (PLC), data acquisition and process control, automatic identification systems, CNC milling and turning, CAD/CAM design and manufacturing. Schools can purchase a complete TEAM laboratory or a smaller selection of tekLINKs, as space and budget allow. Additional TekLINKs can be added at any time to expand the lab.

Computer Integrated Manufacturing (CIM) Systems

           ER-Open CIM

          Our ER-Open CIM system combines computers, software, communication networks and industrial quality equipment such as robots, CNC machine tools, storage and retrieval systems, and material handling, assembly and quality control devices.  The system gives students hands-on experience with actual computer integrated design and manufacturing applications within a laboratory environment.

          The ER-Open CIM cell is modular and can be supplied in many different configurations.  The following basic elements are required for a CIM cell to function:

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          Workstations can be configured along the conveyor and more can be integrated within the CIM system, for tasks such as CNC machining, plastic forming, laser engraving, hydraulic, pneumatic and PLC device operation, quality control inspection and more.  The system can be designed and built according to customer specifications and incorporate computer and manufacturing equipment already on-site.  Most of the components used in the ER-Open CIM are our products.

          The ER-Open CIM system includes a number of communication and control systems that are interfaced to provide both individual control of workstations and overall control of the system.

          The system is operated and controlled through the Open CIM, Windows-based software developed by us.  Open CIM software provides numerous CIM capabilities: CIM cell and station management; part, order and machine definition; ASRS control and tracking; MRP; report generation; and production scheduling.  The software also includes a 3D solid model whose dynamic display provides online tracking of the manufacturing process and off-line simulation of the CIM process.  In addition, a virtual CIM setup module allows students to design and configure both real and simulated CIM cells.

          The ER-Open CIM system’s selling price ranges from $300,000 for small configurations to $600,000 for industrial level systems.

           ER-MicroCIM

          Our table-top CIM system, ER-MicroCIM, includes all the components of an industrial CIM on a small-scale while using the same powerful Open CIM software developed for our large-scale CIM systems.  The standard ER-Micro CIM includes two robots: one tends a storage rack and a parts feeder, and performs assembly operations; the other tends a CNC machining center.  In addition, a vision system performs automated inspection operations. 

          The ER-Micro CIM’s selling price ranges from $110,000 to $180,000 depending on the number of robots, number of stations and the type of equipment included in the system.

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Educational Robotic Systems

           SCORBOT-ER Vplus

          Designed for laboratory and training applications, the SCORBOT-ER Vplus is a versatile five-axis vertically articulated robot.  This powerful robotic system includes a real-time, multi-tasking controller with PID control and PWM drive, and provides all the necessary features for integration into FMS and CIM environments.  The system can be programmed and operated in ACL, the controller’s internal Advanced Control Language, or by using Windows-based robotics software.

           SCORBOT-ER IX

          An industrial grade, vertically articulated robot, the SCORBOT-ER IX offers advanced robotic path control, speed and accuracy at a reasonable price.  Its 2 kg (4.4 lb) payload capacity makes this robot suitable for many light and medium load applications.  Using a real-time, multi-tasking, continuous path controller that can simultaneously control up to 12 axes and 32 I/Os, this system meets the most demanding requirements of a robotic workcell.

           SCORA-ER 14

          A sturdy, horizontally articulated SCARA robot, the SCORA-ER 14 is an excellent low-cost solution for pick and place assembly operations in manufacturing training facilities.  It offers both speed and accuracy as well as a payload capacity of up to 3 kg (6.6 lb).  With a powerful controller, this real-time, multi-tasking, continuous path robotic system provides superior workcell control and integration within a CIM system.

           SCORBOT-ER 4u

          Programmed, operated and controlled from any PC using a32-bit Windows environment, Universal Serial Bus (USB) technology and an NEC-DSP processor, the educational SCORBOT-ER 4u system emulates industrial robotic applications.  The 5-axis vertically articulated robot can be mounted on a tabletop, pedestal or linear slidebase. The robot’s speed and repeatability make it suited for both stand-alone operations and integrated use in automated workcell applications such as robotic welding, machine vision, CNC machine tending and other FMS operations. The robot is designed to enable observation of its working mechanical parts while ensuring a safe environment for students.

          SCORBOT-ER 2u

          The SCORBOT-ER 2u is designed for teaching robotics in the classroom or lab. This vertically articulated robot is fully enclosed and ensures maximum student safety.  The SCORBOT-ER 2u combines a sturdy yet sophisticated mechanical arm with state of the art robotic control technology and software. The system is based on a powerful 32-bit RISC microcontroller and a plug and play USB connection to the PC.

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           ASRS²

          An integral part of a CIM system, the ASRS² is a rectangular automated storage and retrieval system (ASRS) with two parallel stacks containing 72 storage bays.  A dedicated Cartesian robot tends the two bays and transfers raw materials and parts to and from the CIM conveyor.

           ASRS-36

          An integral part of a CIM system or a stand-alone Cartesian robot, the ASRS-36 is a rectangular automated storage and retrieval system (ASRS) containing 36 storage bays.  The robot transfers raw materials and parts to and from the CIM conveyor.

Industrial Robotic System

           Motoman-SV3 with Controller-BRC

          The Motoman-SV3 with Controller-BRC is an industrial robotic system suited for applications such as arc welding, assembly, dispensing, materials handling and machine tending.  The fully articulated, six-axis robot arm is a product of YEC.  The robot controller and software are produced by our YET subsidiary.  Controller-BRC is an AC servo controller whose 32-bit microcontrollers provide high performance and flexibility for the SV3 robot.

Robotic Software

           SCORBASE

The SCORBASE robotic control software provides an intuitive tool for programming and operating the SCORBOT line of robots and robotic workcells.  Several levels of the software gradually introduce students to a range of robotic commands and functions, with SCORBASE offering the most extensive programming and control features.  A number of robotics training packages are available for SCORBASE.

           RoboCell

          RoboCell is a 3-D solid modeling software package, designed for the SCORBOT line of robots and their environment.  It is fully integrated with SCORBASE for Windows, the programming and operational software of the SCORBOT robots.

          Using RoboCell and SCORBASE, students can create and fully simulate the operation of a robot and automated devices in a flexible manufacturing system.  Students can experiment with a variety of workcells in an off-line mode, even if the environment does not exist in the lab.  Since RoboCell’s virtual robots and devices are based on actual dimensions and functions of SCORBOT equipment, programming can be performed and tested in RoboCell, and then executed online in an actual SCORBOT workcell.  Advanced students can design 3D objects and load them into RoboCell for use in a virtual workcell.

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           ACL

          SCORBOT-ER Vplus, SCORBOT-ER IX, SCORA-ER 14 and PERFORMER-MK3 robots are supported by Advanced Control Language, or ACL.  ACL is programmed and stored on a set of EPROM chips within the robot controller and provides advanced programming capabilities as well as direct control of individual robot axes.  ACL is a fully multi-tasking, real-time environment.  ACL provides continuous path control, linear and circular interpolation, path optimization, sensor interrupt and event driven programming, user-accessible control parameters, and various velocity control profiles.  Interface software facilitates operator access to the ACL environment from a PC and enables off-line program editing and downloading of programs to the ACL controller.

          Our new ACL-Win software provides access to Controller-BRC’s ACL environment and functions. ACL-Win is a full-featured 32 bit Windows application with all the capabilities provided by the Windows 98 and 2000 operating environments.  Menus, icons and dialog boxes greatly simplify programming and control of the robotic system.

Accessories

          We offer numerous accessories that allow users to create and modify robotic workcells.  Many accessories are integrated into the workcell by means of input/output connections to the robot controller.  In addition, all of our robot controllers can control motor-driven accessories, such as conveyor belts, rotary index tables, XY positioning tables, and linear slidebases on which robots are mounted to increase their mobility and working range.

          A number of grippers and end-effectors enable different types of applications, such as vacuum gripping, liquid dispensing, and manipulation of differently shaped objects without requiring tool changing.

          Several types of storage devices and parts feeders can also be integrated into robotic workcells.  All feeders are adjustable to accommodate raw materials and parts of various shapes and sizes.

           Teach Pendants

          All of our robotic systems offer an optional hand-held terminal for controlling the robot and peripheral axes connected to the controller.  Teaching pendants have an LCD display and function keys that simplify programming and control operations, such as moving the axes, recording positions, sending the axes to recorded positions and activating programs.

Machine Vision Systems

           ViewFlex

          We have developed a new machine vision system that takes advantage of the latest vision and software technologies.

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          The ViewFlex system incorporates Matrox Inspector, an interactive imaging software designed for scientific and industrial applications, and the Intel^® USB PC Camera Pro, which provides 24-bit color digital pictures (640x480) and video (30 fps).

          The software provides access to an extensive set of optimized functions for image processing and enhancement, blob analysis, gauging and measurement, and pattern matching. ViewFlex includes a Microsoft’s Visual Basic^® for Applications (VBA) compatible scripting environment and enables interaction with other Windows^® applications using OLE/Automation.  Users can design and develop vision applications to meet specific research and integration requirements.

          The ViewFlex system is well suited for precision measurement, flaw detection and assembly inspection.  The system can be used for stand-alone vision operations, integrated in ER-Open CIM systems for automated quality control, and combined with SCORBOT robots for vision-guided robotic applications.

Automation and Control Training Systems

          We have developed a number of training systems that are based on bench top panels and Windows-based software.  These systems are an integral part of the TEAM (formally AMT] product line, and are also used as stand-alone modules in school laboratories.

Pneumatics and Hydraulics Technology

          Our HydraFlex and PneuFlex systems comprise slotted aluminum training panels with a wide assortment of industrial grade pneumatic/hydraulic and electro-pneumatic/hydraulic components.  Students can mount and configure components on the panel in order to create a variety of applications.  Students can connect different components, change physical parameters and observe system responses.  Each system is available in three levels: Basic, Advanced and Electro.

          PneuLine is a training panel with fixed components.  Students can alter connections and create various pneumatic circuits.

          PneuMotion and HydraMotion are CAD simulation and operation software packages that teach students how to design and operate pneumatic/hydraulic and electro-pneumatic/hydraulic circuits.  Software animation provides a working simulation of circuit operation and allows students to observe the effectiveness of their pneumatic circuit designs.

          Software and hardware can be integrated for online control by means of our CP/C 2000A computer interface unit.  The combination of hardware and software gives students experience in the design and construction of pneumatic/hydraulic circuits commonly used in industrial applications.

Programmable Logic Controller (PLC) Technology

          Our PLCLine is a panel with fixed components that include a DC servo motor, encoder, limit switches, proximity sensor, solenoid, buzzer, lamps and switches.  The devices can be connected, activated and controlled in numerous configurations.

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          PLCMotion is a simulation software package with HMI animation that provides a working simulation of PLC programming and operation.  This Windows-based simulation software allows students to observe and understand the control logic behind the operation of industrial PLCs and gives them practical experience in the fundamentals of PLC programming and control. The software’s graphics editor allows students to create a complete production line or industrial process in simulation mode.

          PLCMotion can be used as an offline, simulation tool with its collection of sample applications.  It can also be used online with our CP/C 2000A computer interface unit or an industrial Allen-Bradley PLC (SLC 500 or MicroLogix).

Process Control

          The three Process Line panels: Pressure, Level & Flow and Temperature, are systems for demonstrating and teaching control processes.  Each panel may be controlled by a PC or a PLC. Companion software provides 3D simulation and online tracking of all control variables. Courseware provided with these systems teaches the principles of process control, including an overview of the required mathematical background.  The systems demonstrate different control algorithms such as open-loop, closed loop, on-off and PID control, and allow students to experiment with fine tuning of control parameters.

e-Learning Content and Web-Based Learning Management System

          Our e-learning unit is currently developing a comprehensive library of web-based training modules that capitalize on the proven TEAM product line marketed and developed by our educational division.  The web-based modules will be managed by LearnMate, our new robust Learning Management System (LMS).  LearnMate concentrates the e-learning experience into a manageable desktop web-based application, providing students and instructors with a powerful curriculum management and administration system.

          In December 2002 we acquired all assets relating to Mentergy Ltd.’s TrainNet activity. TrainNet is a highly scalable, broadband virtual classroom application that provides high quality multicast video transmission, voice over IP, robust student/instructor interaction and other advanced tools to deliver instructional material over geographically dispersed e-learning environments.

          XtraDrive

          XtraDrive is YET’s first product and is a next generation intelligent servo driver with an integrated positioner. The XtraDRive is based on a unique propriety control technology offering solutions for the most demanding applications. The XtraDrive includes a software tool, called XtraWare, for the setup, optimal tuning and user programming of the XtraDRive AC servo driver.

Marketing and Customers

          Typical Educational Sector customers are universities, colleges, high schools (technical and vocational), junior high schools and research and developments institutions.  The products of our Educational Sector, which provide a relatively low-cost alternative to the purchase of industrial robots for teaching purposes, incorporate special design features for ease of teaching.

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          The Educational Sector currently markets its products through our subsidiaries and independent distributors in Europe, Asia and South America. Since 1997, these products have been distributed to the educational market in the U.S. and Canada through Intelitek. 

          Most of the Educational Sector products are aimed at the export market. The principal markets for our products and third party products marketed by our Educational Sector are the U.S., the Far East, Israel, South America and Europe which accounted for  43.3%, 20.1%,11.0%, 11.8% and 2.4%, respectively, of the sector’s sales in 2002. Most of our sales in the Israeli market relate to third-party products. Most of the Educational Sector’s products resulting from our research and development are aimed at the export market. 

          In mid 2001, YET’s board of directors reached a resolution whereby YET would start to develop new independent marketing channels for the sale of its products and develop products that will be sold under the YET brand name. In 2002, YET initiated marketing activities in Europe and the U.S. in order to establish a presence in these markets and entered into negotiations with a European company and U.S. companies in regard to private label agreements.  Although YEC was supposed to help in establishing marketing channels for YET, due to fundamental changes in YEC’s marketing system in Europe its progress was delayed. In early 2003, YET began to seek independent distributors to market its products in Europe. At the same time YET realized that YEC would not distribute YET products in the U.S., and that it would have to establish an independent marketing network there.  Action on this matter has been started.  During this period YET continued its efforts to market YEC’s products in Israel.

Manufacturing and Supply

          Our Educational Sector manufactures most of its products in-house.  Operations mainly include assembly and quality control.  Machining and some other basic operations are provided by sub-contractors.

Patent and Proprietary Rights

          In general, our Educational Sector products are not protected by patents.  In 1997, however, we registered a patent in Israel for the method and apparatus used for the direct teaching of automatic machines.  This patent passed the International preliminary examination in accordance with the PCT procedure.  The patent application was approved and registered in the U.S. There was an initial review by the European Level that did not raise significant opposition. The application was passed to the Individual European Countries which we designated.

          In December 1998, YET filed an application for a patent in Israel and in December 1999 it filed an international application in accordance with the PCT procedure regarding an improved servo mechanism control system and method.  This application was approved and the patent is under examination at the national level. In 2000 and 2002, YET filed an additional application for a patent in Israel and in accordance with the PCT procedures regarding a high resolution position sensor device and method.  In 2002 both of the patent applications were approved by the PCT and are now being examined in the national stage. In 2003 YET filed an application for a patent in accordance with the PCT procedures regarding the system and method to eliminate the dead time influence in a PWM driver. This application is also under examination at the national level.

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          During the years 2000, 2001 and 2002, MemCall submitted nine patent applications to the PCT relating to its new technology concerning memory call-out functions.

Competition

          To the best of our knowledge, some competition exists in Israel for our products.  This competition is not material in the robotics field, but is more significant with respect to the Light Machine product line manufactured by Intelitek Inc., our fully owned subsidiary.  There is also significant competition in Israel for the third-party products marketed by our Robotec Technologies Ltd. subsidiary in Israel.

          Our Educational Sector has competitors in all the markets to which it exports its products.  Its major competitors operate worldwide, some of whom have greater financial resources than our company.

          The ability of our Educational Sector to compete successfully is based, among other things, on the quality and pricing of the competing products in comparison to those of our Educational Sector, as well as the resources that will be available to our Educational Sector for research and development and marketing. 

          YET’s primary competitors are Siemens, Bosch Rexroth, SEM Eurodrive (in Europe) and Rockwell (in the U.S).  The principal factors affecting competition in the market for motion control are performance, reliability and price. 

C.     Organizational Structure 

          Sets forth below is the legal name, location and country of incorporation, percentage of ownership and description of business of each of our subsidiaries:

          Intelitek Inc., a wholly owned subsidiary incorporated in Delaware, U.S. is mainly engaged in the development, manufacturing, marketing, sale, technical support and maintenance of CNC products (a product line that was procured from Davenport Industries LLC), and markets them under the name of Light Machines. Intelitek Inc. is also engaged in the marketing, sale, technical support and maintenance of our products in North America.

          Eshed Robotec B.V., a wholly owned subsidiary incorporated in the Netherlands, is engaged in making investments in new fields of activity.

          Robotec Technologies Ltd., a wholly owned subsidiary established in Israel, is engaged in the marketing, distribution, installation and maintenance of our products and other companies’ products for the scientific and technological educational market in Israel.

          Computras Computerized Training Systems Ltd., a wholly owned subsidiary established in Israel, is engaged in the development, production and marketing of educational software.

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          Yaskawa Eshed Technology Ltd. is an Israeli corporation in Israel in which we own a 50% equity interest. YEC holds the remaining 50% interest in YET.  YET is engaged in the planning, development and manufacturing of motion control products for the industrial market, and also provides development services to YEC in that field.

          MemCall  is a development stage company that is engaged in the development of a new electronic chip which will streamline searches performed in a computer’s memory.  MemCall LLC, a Delaware limited liability company, is a 82% owned subsidiary of our wholly owned subsidiary Eshed Robotec B.V. MemCall LLC holds 100% of MemCall Ltd., an Israeli corporation. 

D.     Property, Plants and Equipment 

          In January 1999, we entered into a lease for a parcel of land in the industrial park Rosh Ha’Ayin with the Israel Land Authority, where we constructed a 83,000 square feet building for offices and production facilities.  The lease for the land expires in 2042 and can be renewed for an additional 49 years.  We and five of our subsidiaries currently occupy approximately 60% of the new facility.

          We have leased approximately 13,800 square feet in the building to Siemens Israel Ltd., for a period of five years commencing May 2000 for approximately $1 million plus maintenance fees. Siemens has an option to extend the lease for additional periods of up to five years.

          Approximately 9,600 square feet have been leased to Lynx Photonic Networks Ltd. for a period of five years commencing January 2000 for $470,000 plus maintenance fees. Lynx Photonic has an option to extend the lease period for an additional five years. Lynx Photonic is also leasing an additional space of 7,700 square feet, for a period of 30 months commencing February 2001 for $250,000 plus maintenance fees. Lynx Photonic has notified us that it will not exercise its option to extend the lease term.

          Intelitek’s lease for its facility in Manchester, New Hampshire, will terminate in July 2004. The annual rent is approximately $133,000.

          MemCall’s lease agreement for its facility in California will terminate in November 2003.  The annual rent is approximately $19,200.

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ITEM 5.          OPERATING AND FINANCIAL REVIEW AND PROSPECTS 

A.      Operating Results

          You should read the following discussion and analysis in conjunction with Item 3A. – “Selected Financial Data” as well as our consolidated financial statements and related notes which appear elsewhere in this registration statement. The following discussion contains forward-looking statements that reflect our current plans, estimates and beliefs and involve risks and uncertainties.  Our actual results may differ materially from those discussed in the forward-looking statements.  Factors that could cause or contribute to such differences include those discussed below and elsewhere in this registration statement.

General

          Our financial statements are prepared on the basis of historical cost adjusted for changes in the general purchasing power of the Israeli currency. Accordingly, the nominal figures in the financial statements (we maintain our books of account in nominal NIS) are adjusted to NIS in the last month of the reported period (December 2002).  The adjustment is made in accordance with principles specified in the pertinent opinion issued by the Institute of Certified Public Accountants in Israel.

          Non-monetary items in our balance sheet are adjusted for changes in the CPI from the month of the transaction to the month of the balance sheet. The following items are treated as non-monetary: inventories, prepaid expenses, advances to suppliers, long-term investments, deferred taxes on income, fixed assets, know-how and shareholders’ equity. Monetary items are presented in the balance sheet on the basis of nominal amounts at that date.

          Items in our statement of income are adjusted for changes in the CPI as follows: amounts relating to non-monetary items (e.g. depreciation and changes in inventories) and certain provisions (e.g. for severance pay) are adjusted on the same basis as the related balance sheet item. Other revenues and expenses (excluding financial) are adjusted on the basis of changes in the index between transaction date and balance sheet date.

          A convenience translation into U.S. dollars at the rate of exchange between the NIS and the U.S. dollar at December 31, 2002 (NIS 4.737 = $1) is also presented for the year ended December 31, 2002, and elsewhere in this annual report. The translation into U.S. dollars should not be construed as a representation that the Israeli currency amounts actually represent or could be converted into U.S. dollars.

Recent Accounting Pronouncements

          The Financial Accounting Standards Board recently issued Statement of Financial Accounting Standards (“SFAS”) No. 146 “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 136”). SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit and Activity (including Certain Costs Incurred in a Restructuring)”. SFAS 146 improves financial reporting by requiring 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. The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002. Adoption of SFAS 146 is not expected to have a material effect on the Company's financial position or operating results.

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           In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34” (“FIN No.45”). FIN No.45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN No. 45 does not prescribe a specific approach for subsequently measuring the guarantor’s recognized liability over the term of the related guarantee. It also incorporates, without change, the guidance in FASB Interpretation No. 34, “Disclosure of Indirect Guarantees of Indebtedness of Others,” which is being superseded. The disclosure provisions of FIN No. 45 are effective for financial statements of interim or annual periods that end after December 15, 2002 and the provisions for initial recognition and measurement are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002, irrespective of a guarantor’s year­end. We do not expect the adoption of FIN No. 45 to have a material impact on our results of operations or financial position.

Critical Accounting Policies

          We have identified the policies below as critical to the understanding of our financial statements.  The application of these policies requires management to make estimates and assumptions that affect the valuation of assets and expenses during the reporting period.  There can be no assurance that actual results will not differ from these estimates. 

          We prepare our financial statements in accordance with Israeli GAAP and United States GAAP.  As such, we are required to make certain estimates, judgments, and assumptions that management believes are reasonable based upon the information available.  These estimates, judgments and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. 

          The significant accounting policies that we believe are the most critical to aid in fully understanding and evaluating our financial condition and results of our operations are discussed below.

           Revenues Recognition.  In December 1999, the SEC issued Staff Accounting Bulletin No. 101, or SAB 101, as amended in June 2000, which summarizes the staff’s views in applying generally accepted accounting principles to revenue recognition in financial statements.  We adopted SAB 101 during the fourth quarter of 2000.  The adoption has resulted in our deferral of recognizing income from the sale of certain products until the date of their installation.  Prior to the adoption of SAB 101, we recognized income from the sale of these products on delivery to the customer.  For contracts under which we are entitled to revenue after the execution of defined stages of the transaction without a liability to complete, the revenue is recognized with the entitling supply.  Revenues from the sales of shelf products are recognized on delivery to the customer.  Revenues from the execution of work orders are recognized on completion and only when there is no significant uncertainty that the customer will acknowledge the goods and the receipt of the consideration.  Revenues from development services are recognized upon completion of the development and in accordance with the terms of the related contracts.    Revenues from the grant of production licenses are recognized upon fulfilling the terms of the commitments under the contract.

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          Revenues from the sale of software rights are recognized when the rights are transferred to the customer, when payment has been determined, collection is probable and the Company has no liabilities with respect to the sale.

          If substantial commitments exist for additional performance, such as software development, software adjustment, integration or installation, revenues are usually recognized in accordance with the percentage of completion, based on an estimate of the proportionate part of the work that has been performed.

          Inventories.  Inventories are recorded at the lower of cost or market value. The cost of raw materials is determined on a moving average basis. The cost of work–in-process is determined on a direct production cost basis, plus allocated indirect expenses, all of which are on average basis.

          Fixed Assets.  Fixed assets are stated at cost.  Assets manufactured by us are valued at the cost of finished products of the same type less accumulated depreciation, financing costs of credit lines opened for financing the purchase of the building, in the period prior to its use, have been capitalized.  Depreciation is calculated according to the straight line method at the following rates, which are considered to be adequate for the depreciation of the assets over the course of their estimated useful lives: machinery and equipment (between 10% to 20%, mainly 20%); office equipment and furniture (between 6% to 10%, mainly 6%); computers and computerized equipment (between 20% to 33%, mainly 33%); vehicles (between 15% to 20%, mainly 20%) and building (between 2% to 4%, mainly 2%).

          Investments in investee companies and other companies. Our investments in investee companies are stated in our financial statements on an equity value basis.  The excess of cost of the investment in an Investee company over its net equity value on acquisition, which is not directly attributable, represents goodwill and is amortized over a period of ten years.  Investments in other companies, held as long-term investments, are presented at cost which, according to a management estimate, does not exceed their fair value.  

          Research and development expenses.  Research and development costs, net of government royalty-bearing grants, are charged to income as incurred.

Significant Costs and Expenses

          Depreciation and amortization expense. Depreciation of property, building and equipment is provided on a straight-line basis over the course of their estimated useful lives. Amortization of our core intellectual property is provided on a straight-line basis over a period of three years.

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          Research and development expenses.  We have invested a significant portion of our resources into the development of products.  The following table sets forth the total research and development costs, the amount of royalty-bearing grants received from the Government of Israel, and the net research and development expenses for the periods indicated:

          Employee benefits expenses.  Employee benefit expenses consist primarily of payments to employees for their services as employees.

          Other expenses from ordinary activities.  Other expenses from ordinary activities consist primarily of accounting and administrative services, travel, insurance, marketing and overhead expenses.

Results of Operations

           The following table sets forth, for the periods indicated, selected financial information with respect to our operations as a percentage of revenues:

Year Ended December 31, 2002 as Compared with Year Ended December  31, 2001

          Revenues. Revenues consist primarily of product sales and revenues from services including project development, maintenance and support and leasing revenues, increased by approximately NIS 222,000 ($47,000) to NIS 87.8 million ($18.5 million) from revenues of NIS 87.6 million in 2001, principally as the result of an approximately NIS 11.3 million ($2.4 million) increase in revenues in the Educational Sector from an e-learning project for which revenues were recognized this year and the approximately NIS 4.5 million ($0.95 million) increase in revenues from development services of a proportionately consolidated company.   This increase was partially offset by a decrease of approximately NIS 3.5 million ($0.74 million) in revenues from the sale of Light Machine products, and a decrease of approximately NIS 11.6 million ($2.45 million) in sales of the products of a proportionately consolidated company.

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          Cost of Revenues.  In 2002, our cost of revenues for products manufactured by us as well as products manufactured by others was 48.0% of revenues compared with 60.0% of revenues in 2001.  The decrease in the cost of revenues resulted mainly from a different product mix and an increase in revenues from development services and royalties of YET, our proportionately consolidated subsidiary.

          Gross Profit. Our gross profit increased by 29.0% to approximately NIS 45.6 million ($9.6 million) in 2002 from approximately NIS 35.3 million in 2001. The increase in the gross profit resulted mainly from a different product mix, and an increase in revenues from development services and royalties of YET, our proportionately consolidated subsidiary.  Operating expenses in 2002 totaled approximately NIS 41.4 million as compared with approximately NIS 41.6 million in 2001. Operating income in 2002 was approximately NIS 4.2 million ($0.9 million) as compared with operating loss of approximately NIS 6.2 million in 2001.

          Research and Development.  Total research and development expenses increased 3.4%  to approximately NIS 13.0 million ($2.8 million) in 2002 from approximately NIS 12.6 million in 2001, mainly as a result of our increased investments in the development activities of MemCall which totaled approximately NIS 6.1 million in 2002, compared with approximately NIS 5.1 million in 2001. In addition the investments in the development activities of e-learning increased by NIS 0.4 million ($0.1 million), and the development expenses of YET increased by NIS 0.9 million ($0.2 million). This increase was partially offset by the decrease in the investments in the development activities of the historical activities of the Educational Sector by approximately NIS 1.9 million ($0.4 million). Research and development grants in the amount of NIS 3.1 million ($0.65 million) were received in 2002 from the Office of the Chief Scientist of the Israeli Ministry of Industry and Trade.  As a result, net research and development costs increased 3.4% to approximately NIS 13 million ($2.75 million) in 2002 from approximately NIS 12.6 million in 2001.

          Marketing and Selling.  Marketing and selling expenses decreased 10% to approximately NIS 14.5 million ($3 million), from approximately NIS 16.1 million in 2001, mainly due to a decrease in the marketing and selling expenses of the Educational Sector.

          Administrative and General.  Administrative and general expenses increased 8.2% to approximately NIS 13.9 million ($2.9 million) in 2002 from approximately NIS 12.8 million in 2001, mainly due to increased salary provisions for directors.

          Financial Income (Expenses,) Net.  We had financial expenses of approximately NIS 1.4 million ($0.3 million) in 2002, compared to financial income of approximately NIS 1.9 million in 2001.  The financial expenses in 2002 derived mainly from interest, the erosion of loans that were used for financing the construction of our Rosh Ha'Ayin building, in the amount of approximately NIS 2 million and differences in exchange rates that were offset mainly by charges of interest for our current operations.

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          Other Income.  Other income amounted to approximately NIS 1.7 million ($0.35 million) in 2002 compared with other income of approximately NIS 2.75 million in 2001, mainly due to a decrease in net income from leasing space in our Rosh Ha’Ayin building of approximately NIS 1.1 million in 2002 compared with a an increase in net rental income from leasing space in our building of approximately NIS 1.4 million in 2001.

          Net Profit.  We had net profit of approximately NIS 3.4 million ($0.7 million) in 2002, as compared with net loss of approximately NIS 2.4 million in 2001. The Educational Sector accounted for approximately NIS 8 million ($1.7 million) of net income, income from our Rosh Ha’Ayin building in the sum of approximately NIS 1.5 million ($0.32 million), and the profits of a proportionately consolidated company in the sum of approximately NIS 1.7 million ($0.35 million), which were partly offset by investments in the development activity of MemCall in the sum of approximately NIS 7.6 million ($1.6 million).

Year Ended December 31, 2001 as Compared with Year Ended December 31, 2000
Amended and Restated

          Revenues. Revenues in 2001 increased by approximately NIS 19.6 million from revenues in 2000, principally as the result of an approximately NIS 21.8  million increase in sales of Light Machine products and the NIS 2.45 million increase in sales of RoboGroup products.   This increase was partially offset by a decrease of approximately NIS 1.9 million in income from services rendered to YET (a proportionately consolidated company), a decrease of approximately NIS 1.8 million in the sales of YET products and a decrease of approximately NIS 1.4 million in sales with respect to the Eshkolot project.

          Cost of Revenues.  In 2001, the cost of revenues for our products as well as other products marketed by us was 60.0% of revenues compared with 56.8% of revenues in 2000.  The increase in the cost of revenues resulted mainly from a different product mix and a decrease in sales of products with higher gross margins.

          Gross Profit.  Our gross profit increased by 20.4% to approximately NIS 35.3 million in 2001 from approximately NIS 29.4 million in 2000.  The increase in gross profit was offset by an increase in operating expenses of approximately NIS 13.1 million which resulted in an operating loss of approximately NIS 6.2 million as compared with operating income of approximately NIS 0.95 million in 2000.

          Research and Development.  Total research and development costs increased 71.15 % to approximately NIS 12.6 million in 2001 from approximately NIS 7.3 million in 2000, mainly as a result of the increased investment in the development activities of MemCall.  No research and development grants were received in 2001.  As a result, net research and development costs increased 75.8% to approximately NIS 12.6 million in 2001 from approximately NIS 7.15 million in 2000.

          Selling and Marketing.  Selling and marketing expenses increased 48.5% to approximately NIS 16.1 million, from approximately NIS 10.9 million in 2000, mainly due to an increase in the marketing and selling expenses of Intelitek, arising from the acquisition of the Light Machine product line.

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          General and Administrative.  General and administrative expenses increased 23.6% to approximately NIS 12.8 million in 2001 from approximately NIS 10.4 million in 2000, mainly due to our reorganization and the scaling down of our activities in the business development field.

          Financial Income, Net.  We had financial income of approximately NIS 2 million in 2001, compared to income of approximately NIS 1.5 million in 2000.  Our financial income resulted mainly from an increase in interest income, the erosion of loans that were used for financing the construction of our building, in the amount of approximately NIS 0.3 million and differences in exchange rates that were offset mainly by charges of interest for our current operation.

          Other Income.  Other income amounted to approximately NIS 2.75 million in 2001 as compared with other income of approximately NIS 1.44 million in 2000, mainly due to the increase in value of our securities portfolio in the amount of approximately NIS 0.1 million in 2001, compared with a loss in the amount of NIS 0.9 million, in 2000, and an increase in net rental income from leasing space in our Rosh Ha’Ayin building of approximately NIS 1.4 million in 2001. These increases in income were offset by a decline in earnings from the sale of know-how and fixed assets in the amount of approximately NIS 1.1 million.

          Net Loss.  We had net loss of approximately NIS 2.4 million in 2001, as compared with net profit of approximately NIS 89,000 in 2000.

Effective Corporate Tax Rate

           In general, Israeli companies are currently subject to “Company Tax” at the rate of 36.0% of taxable income.

           Our income tax obligations in Israel are based upon our earnings as determined by Israeli statutory purposes and not as determined from the amounts reported based on adjustments on a constant currency basis.  Israeli tax laws recognize the effects of the decline in the purchasing power of the NIS and allow certain adjustments to taxable income to reflect this decline.  For further information see Note 25 of the Financial Statements.

           Our taxes outside Israel are dependent on our operations in each jurisdiction as well as relevant laws and treaties.  Under Israeli tax law the results of our foreign consolidated subsidiaries, which have generally been unprofitable, cannot be consolidated for tax purposes with the results of operations of the parent company.

Impact of Inflation and Devaluation on Results of Operations, Liabilities and Assets

           The U.S. dollar cost of our operations in Israel is influenced by the extent to which any increase in the rate of inflation in Israel is (or is not) offset, or is offset on a lagging basis, by the devaluation of the NIS in relation to the U.S. dollar. Unless offset by a devaluation of the NIS, inflation in Israel will have a negative effect on our profitability as we incur expenses, principally salaries and related personnel expenses, in NIS.  For several years prior to 1997, the rate of inflation in Israel exceeded the rate of devaluation of the NIS against the U.S. dollar and companies experienced increases in the U.S. dollar cost of their operations in Israel.  This trend was reversed during 1997 and 1998.  In 1999 and 2000, the rate of inflation exceeded the rate of devaluation of the NIS against the U.S. dollar.  In 2001 and 2002, the devaluation rate again exceeded the inflation rate in Israel.  We cannot assure you that we will not be materially and adversely affected in the future if inflation in Israel exceeds the devaluation of the NIS against the U.S. dollar or if the timing of such devaluation lags behind inflation in Israel.

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           The following table sets forth, for the periods indicated, information with respect to the rate of inflation in Israel, the rate of devaluation of the NIS against the U.S. dollar, and the rate of inflation in Israel adjusted for such devaluation:

          A devaluation of the NIS in relation to the U.S. dollar has the effect of reducing the U.S. dollar amount of any of our expenses or liabilities which are payable in NIS (unless such expenses or payables are linked to the U.S. dollar).  Such devaluation also has the effect of decreasing the U.S. dollar value of any asset which consists of NIS or receivables payable in NIS (unless such receivables are linked to the U.S. dollar).  Conversely, any increase in the value of the NIS in relation to the U.S. dollar has the effect of increasing the U.S. dollar value of any unlinked NIS assets and the U.S. dollar amounts of any unlinked NIS liabilities and expenses.

          Because exchange rates between the NIS and the U.S. dollar fluctuate continuously (albeit with a historically declining trend in the value of the NIS), exchange rate fluctuations and especially larger periodic devaluations will have an impact on our profitability and period-to-period comparisons of our results.  The effects of foreign currency re-measurements are reported in our consolidated financial statements in current operations.

Conditions in Israel

          We are incorporated under the laws of, and our principal executive offices and manufacturing and research and development facilities are located in, the State of Israel. Accordingly, we are directly affected by political, economic and military conditions in Israel.

Political Conditions

          Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors, and the continued state of hostility, varying in degree and intensity, has led to security and economic problems for Israel.  Since September 2000, there has been significant increase in violence, primarily in the West Bank and Gaza Strip, and more recently there has been a marked deterioration in the relations between Israel and the Palestinian Authority and Israel has experienced many terrorist incidents within its borders.  As a result, peace negotiations between Israel and representatives of the Palestinian Authority have been sporadic and have failed to result in peace. 

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          Several countries continue to restrict business with Israel and with companies having operations in Israel.  Although we are precluded from marketing our products to these countries, we believe that in the past these restrictions have not had a material adverse effect on us.  In addition, as a result of the hostilities between Israel and the Palestinian Authority, most Arab countries with which Israel had commercial and trading agreements have publicly announced the halt of these agreements.  Also, as a result of the Israeli military activities in the West Bank during April 2002, several European countries are considering participating in a boycott of Israeli firms.  We do not believe that these measures will have a material adverse affect on us.  However, restrictive laws, policies or practices directed towards Israel or Israeli businesses could have an adverse impact on our business.

          Some of our employees in Israel are subject to being called upon to perform military service in Israel, and their absence may have an adverse effect upon our operations.  Generally, unless exempt, male adult citizens and permanent residents of Israel under the age of 54 are obligated to perform up to 37 days of military reserve duty annually and all such residents are subject to being called to active duty at any time under emergency circumstances.  In addition, due to the current hostilities between the State of Israel and the Palestinian Authority, the Israeli Ministry of Defense has issued emergency orders to call up a large number of reserve soldiers.  While we have operated effectively under these requirements since we began operations, 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 of any expansion or reduction of these obligations.

          To date, no executive officer or key employee was recruited for military service for any significant time period.  Any further deterioration of the hostilities between Israel and the Palestinian Authority into a full-scale conflict might require more significant military reserve service by some of our employees, which may have a material adverse effect on our business. 

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 intervened in various sectors of the economy by utilizing fiscal and monetary policies, import duties, foreign currency restrictions and controls of wages, prices and foreign currency exchange rates.  The Israeli Government has periodically changed its policies in all these areas.

          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 2001 and 2002, the Israeli rate of economic growth has deteriorated, the NIS has been devaluated and the rate of inflation has increased.  The Israeli Government has proposed certain budgetary cuts and other changes, including increasing the value added tax rate by 1% to 18%, which were adopted by the Israeli Parliament in June2002.  However, the impact on the Israeli economy of these and other measures that may eventually be adopted is uncertain.  In addition, certain credit agencies have stated that they are reviewing Israel’s credit rating.  Should such agencies lower Israel’s credit rating, the ability of the Israeli government to generate foreign financial and economical 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 Israel’s current credit rating.  Economic decline as well as price and exchange rate instability may have a material adverse effect on us.

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Trade Agreements

          Israel is a member of the United Nations, the International Monetary Fund, the International Bank for Reconstruction and Development and the International Finance Corporation.  Israel is a signatory to the General Agreement on Tariffs and Trade, which provides for the reciprocal lowering of trade barriers among its members.  In addition, Israel has been granted preferences under the Generalized System of Preferences from the U.S., Australia, Canada and Japan.  These preferences allow Israel to export products covered by such programs either on a duty-free basis or at reduced tariffs.

          Israel and the European Union Community concluded a Free Trade Agreement in July 1975 which confers certain advantages on Israeli exports to most European countries and obligates Israel to lower its tariffs on imports from these countries over a number of years.  In 1985, Israel and the U.S. entered into an agreement to establish a free trade area.  The free trade area has eliminated all tariff and specified non-tariff barriers on most trade between the two countries.  On January 1, 1993, an agreement between Israel and the European Free Trade Association, known as EFTA, which includes Austria, Finland, Iceland, Liechtenstein, Norway, Sweden and Switzerland, established a free-trade zone between Israel and the EFTA nations.  In November 1995, Israel entered into a new agreement with the European Union, which includes redefinement of rules of origin and other improvements, including providing for Israel to become a member of the research and technology programs of the European Union.  In recent years, Israel has established commercial and trade relations with a number of other nations, including China, India, Russia, Turkey and other nations in Eastern Europe and Asia.

B.      Liquidity and Capital Resources

          Our cash, cash equivalents and securities totaled approximately NIS 24.8 million ($5.2 million) at December 31, 2002 as compared to approximately NIS 11.5 million at December 31, 2001.  This increase resulted mainly from revenues from our e-learning project.

          At December 31, 2002, we had working capital of approximately NIS 29.8 million ($6.3 million) as compared to working capital of NIS 14.2 million at December 31, 2001. Our current ratio at December 31, 2002 was 1.88 compared to 1.31 at December 31, 2001. Our quick ratio at December 31, 2002 was 1.41 compared to 0.95 at December 31, 2001.

          Our operations are financed primarily through working capital, sales of equity securities, bank credit, government grants and interest earned on investments.

          Cash flows derived from current operations.  In 2002, we had a surplus from current operations of approximately NIS 13.6 million($2.9 million) as compared to a deficit from current operations of approximately NIS 4.5 million in 2001.  Of this amount, approximately NIS 1.3 million ($0.3 million) was invested in our building in 2002, as compared to approximately NIS 0.7 million in 2001.

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          Cash flows applied to investment operations.  In 2002, we invested approximately NIS 2.2 million ($0.5 million) in fixed assets as compared to approximately NIS 2.8 million in 2001.  Of this amount, approximately NIS 1.3 million was invested in RoboGroup’s building in 2002 as compared to approximately NIS 0.7 million in 2001

          In 2002 we invested approximately NIS 7.6 million ($1.6 million) in MemCall as compared to approximately NIS 6.4 million in 2001. In the first quarter of 2003 we invested NIS 2.1 million ($0.45 million) in MemCall. Our board of directors approved an investment in the total amount of  $4.25 million in MemCall.

          Cash flows derived from financing operations.  In 2002, we had a surplus in cash from financing operations in the amount of approximately NIS 0.4 million ($0.1 million) as compared to a surplus of approximately NIS 5.7 million in 2001.  The 2002 cash surplus derives mainly from an increase in long term loans.

          In July 1994, we signed an agreement (which was amended in May 1997) in connection with the purchase of rights to a building in the industrial park of Rosh Ha’Ayin.  The total amount of this project was estimated at approximately $7 million, of which 70% was financed by bank credit and the balance was financed from our resources.  At December 31, 2002, we invested $8.2 million in our Rosh Ha’Ayin building project.  As of December 31, 2002 approximately $6.7 million was financed by bank credit. 

          Our average amount of short-term bank credit was approximately NIS 18.4 million in 2002 as compared with approximately NIS 14.8 million at December 31, 2001 and our average amount of long-term bank credit was approximately NIS 15.3 million in 2002 as compared with approximately NIS 16.4 million at December 31, 2001.

          On April 29, 2003, in accordance with the decision of our Board of Directors, the Tel Aviv District Court approved a distribution by way of a purchase of our company’s shares pursuant to Section 303 of the Israeli Companies Law, 1999. The amount of the repurchase program approved by the Board of Directors and the Court is NIS 2,140,000 ($452,000). The implementation of the repurchase program is dependent on market conditions and cash flow availability of the company.

          Our financial requirements and our ability to meet them will depend to a large extent on our future financial performance.  We believe we have sufficient capital resources to meet our operational requirements for 2003.

C.      Research and Development, Patents and Licenses

          In 2002 our research and development efforts were centered on the development of new and existing products.  We invested approximately $2.75 million in research and development in 2002, of which $1.3 million was invested in MemCall.  The following table reflects our research and development expenses during the three years ended December 31, 2002:

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          In the third quarter of 2002, MemCall received an approval from the Office of the Chief Scientist for a grant in the total sum of approximately NIS 4.6 million, which constitutes 50% of a total budget of approximately NIS 9.2 million that was approved by the Chief Scientist pursuant to a development plan that was submitted by the company under the Israeli Research and Development Law. Although the approved budget was for the period January through December 2002, MemCall received the Chief Scientist’s approval to extend the period of this budget until the end of March 2003.

          In general, we received from time to time grants from the Chief Scientist of the Ministry of Trade and Industry of the State of Israel, for our research and development projects.  We have agreed to pay royalties on sales of the products developed from research and development projects that were funded by the Chief Scientist.  In the event that development of a specific product in which the Chief Scientist participates is successful, we will become obligated to repay the grants received relating to the specific product through royalty payments at the rate of 2.4% to 4.6%, based on our sales revenues, up to an amount equal to 100%-150% of the grant received, linked to the exchange rate of the U.S. dollar. In 2002 we paid approximately NIS 360,000 ($75,000) in royalties to the Chief Scientist.

D.      Trend Information

          In the first quarter of 2003 we recorded a loss of approximately NIS 5.9 million ($1.25 million), as compared to a loss of NIS 3.4 million in the corresponding period of 2002. The increase was primarily attributable to the reduced sales in our Educational Sector. We expect that this trend in the Educational Sector will continue in the second quarter and that we will not achieve our financial and business goals for the second quarter of 2003. As a result our Educational Sector is implementing cost cutting measures, mostly by reducing its personnel and combining of related activities and divisions.

Cautionary Statement Regarding Forward-Looking Statements

          The statements contained in this annual report that are not purely historical are forward-looking statements.  Such forward-looking statements also include statements in this Item 5 – “Operating and Financial Review and Prospects”. These statements involve risks and uncertainties and actual results could differ materially from such results discussed in these statements as a result of the risk factors set forth in this annual report.  All forward-looking statements included in this annual report are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements.

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          We have attempted to identify additional significant uncertainties and other factors affecting forward-looking statements in a Risk Factors section which appears in Item 3 – Key Information.

ITEM 6.          DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 

A.      Directors and Senior Management

          The following table lists our executive officers and directors:

          Messrs. Aravot,Kra-Oz, Schleifer, Missulawin, Zenziper, Kraus and Tal will serve as directors until our 2003 annual general meeting of shareholders.  Mr. Dagan and Ms. Gotlieb were elected to serve as our outside directors at our annual general meeting of shareholders which took place on December 20, 2001.  They will serve in such office pursuant to the provisions of the Israeli Companies Law for three-year terms until our 2004 annual general meeting of shareholders.  Thereafter, their office may be renewed for only one additional three-year term.

          Rafael Aravot has been our Managing Director since our formation in 1982 and Chief Executive Officer and Chairman of the Board since February 2001. Since 1999 Mr. Aravot has served as a member of our Compensation Committee.  Mr. Aravot is a director of Yaskawa Eshed Technology Ltd., MemCall Ltd. and MemCall LLC. Mr. Aravot received an M.B.A. from Tel Aviv University and a B.Sc. degree in Mechanical Engineering from the Technion Israel Institute of Technology in Haifa.

          Noam Kra-Oz has been our Managing Director since February 2001 and our Joint Managing Director from 1992 until 2001.  He has also been a director since December 1983.  Mr. Kra-Oz is a director of Yaskawa Eshed Technology Ltd., Intelitek Inc., Robotec Technologies Ltd., Computras Computerized Training Systems Ltd., and Eshed Robotec B.V. Mr. Kra-Oz received a B.Sc. in Pharmacology from the Hebrew University of Jerusalem.

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