20-F

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, 2004

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)

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, 2004, the Registrant had 11,576,539 Ordinary Shares, NIS 0.003 par value per share, outstanding (“Ordinary Shares”).

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

o Yes x No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

o Yes x No

Note-Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

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 filling requirements for the past 90 days.

o Yes x No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer x

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

o Item 17 x Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes x No

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

o Yes x No

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

None

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 x

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 actual results of I.I.S. Intelligent Information Systems Limited (the “Company”, “us” or “IIS”) 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.

Please note that while this Annual Report on Form 20-F is filed as of December 31, 2004 for the fiscal year then ended, the actual filing date of this Annual Report is August 30, 2007. As a result, some of the information contained herein was not known as of December 31, 2004, but is included to supplement the information that was properly reportable as of that date. Such supplemental information has been excerpted from our Annual Report on Form 20-F for the fiscal year ended December 31, 2006 (the “2006 20-F Report”). Readers should refer to the 2006 20-F Report for the most current and comprehensive disclosures regarding the Company.






Item 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS	2

Item 2. OFFER STATISTICS AND EXPECTED TIMETABLE	2

Item 3. KEY INFORMATION	2

Item 4. INFORMATION ON THECOMPANY	10

Item 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS	15

Item 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES	21

Item 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS	27

Item 8. FINANCIAL INFORMATION	28

Item 9. THE OFFER AND THE LISTING	29

Item 10. ADDITIONAL INFORMATION	30

Item 11. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	47

Item 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES	48

Item 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES	48

Item 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS	48

Item 15. CONTROLS AND PROCEDURES	48

Item 16A. AUDIT COMMITTEE FINANCIAL EXPERT	49

Item 16B. CODE OF ETHICS	49

Item 16C. PRINCIPAL ACCOUNTING FEES AND SERVICES	50

Item 16D. EXEMPTIONS FROM THE LISTING REQUIREMENTS AND STANDARD FOR AUDIT COMMITTEE	50

Item 16E. PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATES AND PURCHASERS	50

Item 17. FINANCIAL STATEMENTS	50

Item 18. FINANCIAL STATEMENTS	51

Item 19. FINANCIAL STATEMENTS AND EXHIBITS	51

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 financial data of the Company as of December 31, 2004 and 2003 and for the three years ended December 31, 2004, are derived from the Company’s audited 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, 2002, 2001 and 2000 and for the years then ended 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 Financial Statements included elsewhere in this Annual Report.

Since December 2000, as a result of the decrease of the Company’s interest in StoreAge Networking Technologies Ltd. (“StoreAge”) to below 50%, 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. As the Company has not guaranteed obligations and not otherwise committed to provide further financial support for any of the associated companies, the Company discontinued applying the equity method when the investment account was reduced to zero.

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

	Year Ended December 31,
	2004			2003			2002			2001			2000



Sales revenues							$	62		$	83		$	96
Revenues from research and
development services to an associated company								145			251			0

Total revenues								207			334			96

Cost of sales								38			28			27
Cost of revenues from research and development services to an associated company								51			155			0
Total cost of revenues								89			183			27

Gross profit								118			151			69
Research and development costs								548			479			925
Selling and marketing expenses								49			21			639
General and administrative expenses	$	200		$	441			577			888			899
Impairment of goodwill								186
Non recurring income								(122	)		(180	)

Operating loss		(200	)		(441	)		(1,120	)		(1,057	)		(2,394	)

Financial income (expenses)- net		(4	)		(3	)					(1,547	)		277
Other income (expenses) - net					330									(12	)


Loss before equity in losses of an
associated company and minority interest in
losses of subsidiaries		(204	)		(114	)		(1,120	)		(2,604	)		(2,129	)
Equity in losses of an associated company					(20	)		(1,250	)		(877	)
Minority interest in losses of a subsidiary														740

Net loss	$	(204	)	$	(134	)	$	(2,370	)	$	(3,481	)	$	(1,389	)

Loss per share - basic and diluted	$	(0.03	)	$	(0.01	)	$	(0.21	)	$	(0.37	)	$	(0.16	)

Weighted average number of shares (in thousands) - basic and diluted		11,577			11,577			11,485			9,409			8,901

Balance Sheet Data (in thousands):

	At December 31,
	2004			2003		2002		2001		2000



Working capital	$	(86	)	$	113	$	198	$	1,024	$	2,254

Cash and cash equivalents	$	93		$	133	$	397	$	1,512	$	3,077
Total assets	$	105		$	335	$	549	$	3,233	$	6,349
Short-term bank credits						$	1	$	10	$	10
Long-term debt								$	1	$	2,839

Shareholders' equity (capital deficiency)	$	(86	)	$	118	$	252	$	2,535	$	1,882

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.

Voluntarily liquidation of the Company. In July 2004 our shareholders approved the voluntary liquidation of the Company. The only operating assets of the Company are minority holdings in StoreAge and Enargis. As of July 29, 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 – Entry into Voluntary Liquidation.

We have a history of substantial recurring operating losses and have no current prospects of revenues. We lost approximately $204,000 during the year ended December 31, 2004, $ 134,000 during the year ended December 31, 2003 and $2.4 million during the year ended December 31, 2002. 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 and anti-dilution protection, 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, until December 31, 2004. 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. 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 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 (including the NIS) may have a material adverse affect on our results of operations. 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, until we complete a merger with another operating business, 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 their senior executives. Neither StoreAge nor Enargis maintains key-man life insurance policies covering any of their 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. StoreAge 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, the State of Israel. Although most of Witech’s sales are made to customers outside Israel, it is nonetheless directly affected by the political, economic and military conditions affecting 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. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors, as well as incidents of civil unrest. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners could adversely affect our operations. Since September 2000, terrorist violence in Israel has increased significantly and negotiations between Israel and Palestinian representatives have effectively ceased. 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. We can give no assurance that security and political conditions will not have an impact on our business in the future. Hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners could adversely affect our operations and could make it more difficult for us to raise capital.

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 50 days have elapsed from the date all the necessary approvals and the merger proposals have been submitted to the Israeli Companies Registrar and at least 30 days have passed from the shareholders approval of each of the merging companies. 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.

Service and enforcement of legal process on us and our directors and officers may be difficult to obtain. Service of process upon our directors and officers and the Israeli experts named herein, all of whom reside outside the United States, may be difficult to obtain within the United States. Furthermore, all of our assets, and all of our directors and the Israeli experts named in this annual report are located outside the United States, any judgment obtained in the United States against us or these individuals or entities may not be collectible within the United States. There is doubt as to the enforceability of civil liabilities under the Securities Act and the Securities Exchange Act in original actions instituted in Israel. However, subject to certain time limitations and other conditions, Israeli courts may enforce final judgments of U.S. courts for liquidated amounts in civil matters, including judgments based upon the civil liability provisions of those acts. If a foreign judgment is enforced by an Israeli court, it generally will be payable in Israeli currency. Judgment creditors must bear the risk of unfavorable exchange rates.

Item 4.

INFORMATION ON THE COMPANY

A. Entry into Voluntary Liquidation

As of December 31, 2003 we no longer engaged in any operational business activity other than managing our minority holdings in StoreAge and Enargis. On July 29, 2004 approximately 96% of our shareholders present and voting at a general meeting of shareholders, approved our voluntary liquidation and the appointment of Messrs. Robi Hartman and Aharon Jacobowitz as our joint liquidators. Mr. Hartman has an incentive to maximize shareholder value due to his shareholding in the Company (14.48% on a fully diluted basis as of the date of the liquidation proxy). As of July 29, 2004 we had approximately $200,000 in cash and short-term investments and no foreseeable prospects of income and believed that it was in our best interests and those of our shareholders not to use our remaining cash to pay legal, auditing, listing fees, director fees, to maintain directors and officers liability insurance or for other ongoing company expenses which could be avoided or reduced by voluntary liquidation, without harming our ability to realize in the future the value of our minority holdings in StoreAge and Enargis. Our only remaining purpose was to achieve the greatest possible return on these assets and at that time believed that the realization value of such assets was not attractive. Consequently, we believed that it would be beneficial to us and our shareholders to continue to hold those assets until an attractive exit alternative presents itself and our voluntary liquidation 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 would have been depleted by the end of 2004 or by early 2005. In addition, due to its financial situation, it had 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 our business affairs and in June 2004, all the directors were of the opinion that we could pay our debts within twelve months from the commencement of the voluntary liquidation. This was in part due to the fact that the directors and Mr. Robi Hartman, our current Chairman of the Board of Directors and CEO, who was not paid any compensation by us since April 2003 agreed that this compensation would 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.

In June, 2004 all our directors of the Company filed the appropriate affidavit of solvency with the Israeli Registrar of Companies and, consequently, the voluntary liquidation was performed by the liquidators without court intervention.

For a description of the fees payable to the liquidators, see Item 6. Directors, Senior Management and Employees - B. Compensation.

Under Israeli law, upon approval of the voluntary liquidation by our shareholders no transfer of shares was permitted without the consent of the liquidators.

We are, and have been since our initial public offering in the United States in 1984, required to file annual reports, including audited financial statements, with the SEC. We were in compliance with our reporting obligations through 2003, having filed all reports due through that year, including our annual report for 2002, filed in June 2003. Our Annual Report on Form 20-F for the fiscal year ending December 31, 2003 that was filed with the Securities and Exchange Commission on June 22, 2004 included our financial statements; however, our auditors at that time, Kost Forer Gabbay & Kasierer, A Member of Ernst & Young Global stated in their report that because of the possible material effects on the financial statements of our the then-proposed voluntary liquidation, they were unable to, and did not at that time express an opinion on the financial statements. The financial statements included in the Annual Report therefore did not include an auditors report complying with the requirements of the Form. Consequently, the certification normally required pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 was also omitted from the filing. Following our entry into voluntary liquidation in July 2004, mainly due to the budgetary constraints described above, we ceased filing reports with the SEC, or preparing audited financial statements, in order to conserve our then very limited funds. Therefore, we remained delinquent with respect to our annual report filing obligations for 2004. No action has yet been taken by the SEC as a result of our failure to file reports, although the Company has received correspondence from the SEC’s staff noting that the Company is delinquent in its reporting obligations. Our US counsel had previously initiated discussions with the staff of the SEC regarding a possible voluntary deregistration of our ordinary shares to address our failure to file required annual reports, without any other sanctions or penalties, but those discussions did not materialize in any binding order or settlement.

B. History and Development of the Company.

We were incorporated in Israel on January 28, 1980.

Until early 1999, we were 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 our products prior to completion (in early 1999) of the Restructuring, please refer to our Annual Report on Form 20-F for the fiscal year ended December 31, 1997.

From 1999 through 2003 we engaged in the following transactions:

– 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, we divested ourselves of our 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 us to expend $945,000. Net gain realized as a result of the sale of NetWiz amounted to $616,000.

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

– In March 1999, we sold most of the assets and the buyer assumed most of the liabilities of our Decision Data Division (“Decision Data”), which comprised all of our United States, United Kingdom and German operations. We 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, we acquired the assets of Eastek Embedded Systems (Meitav) Ltd. (“Eastek”), a private Israeli software company, to enhance our R&D capabilities in order to develop storage networking solutions for the SAN market with a focus on storage over Internet Protocol (IP) applications.

– In December 2000, we 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 our investment in StoreAge’s second round of financing.

– In January 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:

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

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

– In March 2003, we sold our 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, we received a 25% ownership interest in Enargis and were entitled to commissions of 3% of certain revenues derived from existing customers or customers with which we had an existing relationship prior to the transaction.

On July 29, 2004, approximately 96% of our shareholders present and voting at a general meeting of shareholders approved our voluntary liquidation (see the discussion above under “A. Entry into Voluntary Termination” in this Item).

C. Business Overview.

For information on our business activities in 2004, see “A. Entry into Voluntary Liquidation” above in this Item 4.

StoreAge

In order to enable total focus on the new fast growing, large storage area networks (“SANs”) 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 was engaged in the development, marketing, sale and support 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.

In February 2005, StoreAge raised $5,900,000 in convertible bridge loan financing from its shareholders. We did not participate in that financing.

In October 2005, in contemplation of an initial public offering of StoreAge on the Alternative Investment Market of the London Stock Exchange, all classes of preferred shares of StoreAge and outstanding bridge loans were converted into ordinary shares of StoreAge based on the amount actually invested in StoreAge and all preferential shareholder rights were cancelled. Following this conversion we held 13% of the issued and outstanding share capital of StoreAge (11.74% on a fully diluted basis). The proposed initial public offering of StoreAge was aborted in November 2005 due to the inability of StoreAge to meet its sales forecast and decreased expected sales forecasts.

In October 2006 all shareholders of StoreAge, including us, signed a share purchase agreement with LSI Logic Corporation (“LSI”) for the sale of all issued and outstanding shares of StoreAge to LSI. In November 2006, the sale was closed and LSI paid us gross proceeds of $5,416,692 for all our shares, out of which $703,793 is being held in escrow to satisfy certain possible future claims for a period of 18 months following the closing. At the time of this closing, we held 12.68% of the issued and outstanding share capital of StoreAge (10.89% on a fully diluted basis). This additional dilution resulted from the issuance of shares, issuance of warrants to the Israeli venture lending fund that provided a $4,000,000 loan to StoreAge in March 2006 (that was repaid by LSI) and the increase of shares reserved for options pursuant to StoreAge’s incentive share option plans.

Enargis

Internet Small Computer Systems Interface (“iSCSI”) is a 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 pointed to the emergence of IP storage in the future.

Not even iSCSI’s most ardent supporters expected it to replace Fibre Channel for a long time. They predicted 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.

Enargis offered 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 did not succeed in strengthening its position as an iSCSI based solutions provider or in securing cooperation with significant sales channels. The market for Enargis’ products is at the end of its life-cycle since the iSCSI Initiator and Target codes are available for free in the web. The revenues of Enargis in 2004 were $344,339 and Enargis showed a profit of less than $20,000 for the year ended December 31, 2004 Enargis did not pay Robi Hartman for his services since its inception. Enargis had not paid rent to West End from October 2004 in the amount of approximately $5,700 (this is an off-balance sheet transaction and is not included in Enargis’ financial statements), and owed West End in excess of $12,000 as of December 31, 2004 for loans received. West End has a lien on all of Enargis assets to secure this debt.

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 paths.

—	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 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 enable 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.

D. Organizational Structure.

We have one wholly-owned Israeli subsidiary, IIS Manufacturing Ltd., which has no assets and has been inactive since 1999.

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.

As of December 31, 2004, we held 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, as of December 31, 2004 we held 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, we reduced our leased premises by 65%, resulting in a reduction of our annual rent and additional occupancy costs and for the year ended December 31, 2004, our annual rent was approximately $12,000, with total annual additional occupancy costs, including local taxes, utilities, maintenance and other costs of approximately $8,400 (see Item 7. Major Shareholders and Related Party Transactions – B. Related Party Transactions).

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 financial statements.

Intangible Assets and Goodwill

At December 31, 2002 the entire goodwill was impaired and was written off. Thus during the years 2004 and 2003 we had no goodwill or intangible assets impairment.

Legal Contingencies

Following our entry into voluntary liquidation in July 2004, mainly due to budgetary restraints we ceased filing reports with the SEC, or preparing audited financial statements, in order to conserve our then very limited funds. Therefore, we currently remain delinquent with respect to our annual report filing obligations for 2004. No action has yet been taken by the SEC as a result of our failure to file reports, although the Company has received correspondence from the SEC’s staff noting that the Company is delinquent in its reporting obligations. Our US counsel had previously initiated discussions with the staff of the SEC regarding a possible voluntary deregistration of our ordinary shares to address our failure to file required annual reports, without any other sanctions or penalties, but those discussions did not materialize in any binding order or settlement. As of the date of filing of this Report, there is no assurance that the SEC will not institute an action against us or move to revoke our registration.

Investment in StoreAge and Enargis

During 2002, our investment in StoreAge was reduced to zero. The Company’s investment in Enargis was reduced to zero in 2003. 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 Notes 2.a and 2.b to the Company’s 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

As of December 31, 2003, we were no longer engaged in any operating business activity other than managing the minority holdings in StoreAge and Enargis. 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, 2004, 2003, and 2002

Due to the cessation of the iSCSI operations in December 2002, the Company had no revenues in each of the years 2003 and 2004 compared to $207,000 total revenues in 2002. Revenues from sales and services to unaffiliated customers outside of Israel represented approximately 26% of revenues in 2002.

Gross profit as a percentage of total revenues was approximately 57.0% in 2002.

Due to the cessation of the Company’s iSCSI operations in December 2002, there were no outlays for research and development in 2003 and 2004. Total outlays for research and development in 2002 was approximately $548,000. The net cost to the Company of such outlays was $548,000 in 2002.

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 and 2004. The selling and marketing expenses in 2002 were approximately $49,000 (23.7% of revenues). In 2004 we incurred general and administrative (“G&A”) expenses of $200,000 compared to $441,000 in 2003 and $577,000 in 2002. This reduction was due to a reduction in all expenses, due to cessation of our operating activities during 2003 and our entering into voluntary liquidation at the end of July 2004.

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, 2004 and 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 and a non recurring income in the amount of $10,000 during 2002 as the result of a $140,000 obligation accrued in connection with a compromise settlement with the tax authorities in the U.S.

Our net financial expenses in 2004 were $4,000, compared to $3,000 in 2003, mainly due to exchange rate conversions and open bank balances.

In 2004, we recorded a loss of approximately $204,000 compared with a loss of approximately $134,000 in 2003 and compared with a loss of approximately $2.37 million in 2002. The minimal loss in 2003 reflects the one-time income of $330,000 derived from the settlement of a lawsuit. Had we excluded the income of $330,000 derived from the settlement in 2003, the loss in 2003 would have been $464,000, reflecting a decrease in our general and administrative expenses due to our entering voluntary liquidation commencing in July 2004. The 2002 operating loss reflects the increased investment in iSCSI research and development and difficulty in generating revenues in the iSCSI field.

As a result of the foregoing factors, the Company recorded a net loss of approximately $204,000, $134,000 and $2.37 million in 2004, 2003 and 2002, respectively.

The Company does not expect to be profitable in the near 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 2002, 2003 and 2004, the NIS was devalued (appreciated) approximately 13.02%, (1.63%) and 0.84%, respectively, against the currency basket, and approximately 7.27%, (7.56%) and (1.62%), 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.

As of December 31, 2004, the Company has carryforward tax losses in the amount of approximately $ 39 million, 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 36 million, which may offset against future capital gains for tax purposes for an indefinite period. 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. 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 shareholders have approved the voluntary liquidation of the Company. See Item 3 Key Information – D – Risk Factors “voluntarily liquidation of the Company” and Item 4 – Information on the Company – A. Entry into Voluntary Liquidation

Governmental, Economic, Fiscal, Monetary or Political Factors

Our principal offices and our principal facilities are located in Israel, and each of us is directly affected by the political, economic and military conditions to which that country is subject. Accordingly, our operations 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, terrorist violence in Israel has increased significantly and negotiations between Israel and Palestinian representatives have effectively ceased. We can give no assurance that security and political conditions will not have an impact on our business in the future. Hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners could adversely affect our operations and could make it more difficult for us to raise capital.

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 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.

B. Liquidity and Capital Resources.

The Company had current assets of approximately $103,000 at December 31, 2004, $321,000 at December 31 2003 and $489,000 at December 31, 2002. The ratio of current assets to current liabilities was 0.545 at December 31, 2004, 1.543 at December 31, 2003 and 1.680 at December 31, 2002. The decrease in the current ratio in 2004 was mainly a result of a reduction in cash due to operating activities and the accumulation of Liquidators’ and directors’ fees payable. The decrease in the current ratio in 2003 is mainly a result of a reduction in the amount of accounts receivable and a reduction in cash due to operating activities. For a discussion of the primary currency in which the operations of the Company are conducted see Item 5.A., “Operating Results,” above.

In 2002, 2003 and 2004 the Company recorded a net negative cash flow from operations of approximately $1.10 million, $273,000 (after taking into account the receipt of $220,000 from the settlement of a lawsuit) and $88,000, respectively. In January 2004 we received the final payment of the lawsuit settlement of 2003 in the amount of $110,000. Excluding this amount, the net negative cash flow from operations in 2004 would have been approximately $198,000.

The Company currently has no available lines of credit or other credit facilities.

We anticipate that our existing cash on hand, will be sufficient, at the business levels presently projected, to meet our working capital requirements, including normal capital expenditures, at least until 12 months from the liquidation date. 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 that 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.

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 prior to the commencement of our voluntary liquation proceedings in July 2004 had agreed that compensation for services due to them since April 1, 2003 would be paid only from receipt of proceeds from the sale/exit of our holdings in StoreAge, or Enargis or from raising additional financial resources. In addition, the Company’s liquidators agreed that compensation for their services would 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, 2004 the amount of this unpaid compensation was approximately $182,000, was included as a liability in our financial statements for December 31, 2004. See Notes 5.a and 5.b to the Company’s Financial Statements.

F. Tabular Disclosure of Contractual Obligations

Not applicable.

Item 6.

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A. Directors and Senior Management.

When we entered into voluntary liquidation proceedings in July 2004, we only had three directors: Robi Hartman, Aharon Jacobowitz and Jonathan Nativ. Upon our entering into voluntary liquidation proceedings in July 2004 and the appointment of Messrs. Hartman and Jacobowitz as liquidators, all our affairs were managed by the liquidators.

The Company’s executive officers and liquidators as of December 31, 2004 were as follows:

Name	Age	Expiration of office as Director	Number of Shares Beneficially Owned




Robi Hartman	46	July 29, 2004--	1,751,074
Liquidator

Aharon Jacobowitz	59	July 29, 2004--	0
Liquidator

Jonathan Nativ*Director		July 29, 2004	0

* Member of the Audit Committee and Compensation Committee until entry into Voluntary Liquidation. Robi Hartman has 23 years of experience as an entrepreneur in the field of technology and as an executive for leading technology companies. He acted as a Director of the Company from September 1998 until its entering into voluntary liquidation in July 2004, Vice Chairman of the Board from October 1998 to March 2000, Acting Chief Financial Officer from December 1998 until July 2004, and Chairman of the Board and Chief Executive Officer of the Company from March 2000 until July 2004, and joint liquidator of the Company since July 2004. He serves as the Vice Chairman of the Board of Teledata Networks since the management buyout from ADC Telecommunications in February 2004. He has also served as Chairman of StoreAge Networking Technologies from its inception in 1999 . 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 Political Science and Economics from Bar Ilan University and his Masters in Business Administration (MBA) from Bentley College.

Aharon Jacobowitz served as a director of the Company from May 1995 until its entering into voluntary liquidation in July 2004 and as a joint-liquidator of the Company since July 2004. Since 1989, Mr. Jacobowitz has been a management consultant to large organizations on data processing and management issues. In addition to his consultancy business, Mr. Jacobowitz served three periods as general manager of two high-tech start up companies and the Israeli branch of Coopers and Lybrand consultancy firm. Prior to 1989, Mr. Jacobowitz was employed for 14 years in various capacities in the marketing division of IBM Israel Ltd. His main specialties are networking, midrange systems and project management. He holds a BSc in Mathematics and Physics and an MSc in computer sciences (with distinction) both from the Hebrew University of Jerusalem.

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 was a member of our Audit Committee until entry into Voluntary Liquidation.

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. At our general meeting of shareholders held in July 2004, Messrs. Hartman and Jacobowitz were appointed as joint liquidators and the shareholders approved a fee of $1,000 per month (plus VAT, if applicable), to each of them commencing from the appointment of the liquidation and until distribution of all proceeds of the liquidation to our shareholders. The deferral of these fees represented a significant saving in cash expenses for the Company during 2004. In addition, our shareholders in July 2004 approved that (i) Mr. Jacobowitz will receive an additional bonus as follows: $25,000 (plus VAT, if applicable) if the gross proceeds received by our shareholders is above $0.50 per share, $50,000 (plus VAT, if applicable) if the gross proceeds received by our shareholders is above $1.00 per share and $75,000 (plus VAT, if applicable) if the gross proceeds received by our shareholders 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 our shareholders is above $1.30 per share. Our shareholder further approved that (i) we 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 to the fullest extent permitted by applicable law and subject to the same restrictions and qualifications as currently applicable to indemnification of our directors and officers, and (ii) we will waive any liabilities, claims, demands and causes of action against the liquidators in their capacity as liquidators to the fullest extent permitted by applicable law, with the exception only of actions constituting gross negligence or willful misconduct.

Effective as of April 1, 2003, all of the directors of the Company agreed to suspend their compensation until the Company either received a settlement from an ongoing lawsuit which at that time was in mediation or received 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 would 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, 2004 and the liquidators according to this arrangement was approximately $172,000. However, Mr. Hartman continued to receive compensation from StoreAge for services he performed as Chairman of the Board of StoreAge in the amounts equal to approximately $60,000 for the year 2004. In addition, Mr. Hartman was entitled to compensation for services from Enargis which he has not drawn since its incorporation due to Enargis’ financial situation. 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 December 31, 2004 the amount of these loans was $12,000. These loans are secured by charges on the assets of Enargis and are subject to repayment on demand. In addition, Enargis did not pay rent to West End Technology Investments Ltd. from October 2004. The rent due as of December 31, 2004 was $5,700.

No options were granted to officers or directors during the fiscal year ended December 31, 2002, 2003 and 2004 and all options issued prior to such time have expired. For information on the Company’s stock option plan, see “Stock Option Plans” below.

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 1.47% of the fully-diluted shares of StoreAge.

Board Practices.

In August 1993 our 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”).

During our voluntary liquidation proceedings, from July 2004, our board ceased to function and was replaced by the liquidators and all powers of the board of directors were exercised by the liquidators in accordance with Israeli law. Under Israeli Companies Law, the initial term of an external director is three years and may be extended for an additional three years.

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 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.

Under the Companies Law:

—

An external director must either be professionally eligible or have relevant accounting and financial expertise, buy at least one of the external directors must have relevant accounting and financial expertise.

—

A director with accounting and financial expertise is a director who, due to his education, experience and skills, possesses capabilities relating to and understandings of business and accounting matters and financial statements, which enable him to understand in depth the company’s financial statements and to initiate a debate regarding the manner in which the company’s financial information is presented.

—

A director who meets certain professional qualifications is a director who satisfies one of the following requirements: (1) the director holds an academic degree in either economics, business administration, accounting, law or public administration, (2) the director either holds another academic degree or has obtained other high education in the company’s primary field of business or in an area that is relevant to his position, and (3) the director has at least five (5) years of experience serving in one of the following capacities or an aggregate of at least five (5) years of experience in two or more of the following capacities (a) a senior business management position of a company with a substantial scope of business, (b) a senior position in the primary field of business of the company or (c) a senior public administration position.

—

The board of directors should determine the minimum number of directors having financial and accounting expertise, in addition to the external director, and in making the determination as to a director’s accounting and financial expertise, the board of directors is required to consider, among other things, the education, experience and knowledge of such person with respect to (1) accounting and internal controls matters that are typical to the industry in which the company engages and to companies of similar size and complexity to those of the company, (2) the responsibilities of the company’s auditor and (3) the preparation and approval of financial statements under the Companies Law and the relevant Israeli securities law.

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 a 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. From April 2003, we did not comply with these requirements due to the resignation of certain directors and our inability to attract additional directors During our voluntary liquidation proceedings, from July 2004, our board ceased to function and was replaced by the liquidators and all powers of the board of directors were exercised by the liquidators in accordance with Israeli law. There is no assurance that we will be able to retain existing directors or attract new directors in order to continue 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. From April 2003, following the resignation of one of our two external directors we did not have a legally constituted audit committee under Israeli law. During our voluntary liquidation proceedings, from July 2004, our board ceased to function and was replaced by the liquidators and all powers of the board of directors were exercised by the liquidators in accordance with Israeli law. There is no assurance that we will be able to retain existing directors or attract new directors in order to continue 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 was not active since then.

C. Employees.

During most of 2004, we employed 2 people, one on a part-time basis, in general management and administration and since November 2004, we have employed only a part-time secretary.

D. Share Ownership.

The following chart sets forth director and senior management share ownership in the Company as of December 31, 2004. Each shareholder listed below enjoys the same voting rights with respect to each share.

Name	Title of Class




Robi Hartman	Ordinary Shares	2,107,624	18.2	%	356,550

Aharon Jacobowitz	Ordinary Shares	0	0		50,000

Jonathan Nativ	Ordinary Shares	0	0		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 11,576,539 shares outstanding as of December 31, 2004.

Stock Option Plans

In August 1993, the Company’s last employee share incentive plan (the “Plan”) was approved by the board of directors and later adopted by the Company’s shareholders. The Plan permitted 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. No options were issued pursuant to the Plan during 2004, no options were exercised during this year.

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, 2004, options to purchase up to 406,550 Ordinary Shares were outstanding, exercisable at prices of $3.63 per share, with expiration dates ranging until 2006. Those options 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 6.b. to the Company’s Financial Statements.

Item 7.

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A. Major Shareholders.

During the period from January 1, 2004 through December 31, 2004, Mr. Hartman purchased an aggregate of 379,930 Ordinary Shares of the Company in open-market transactions,

The following table sets forth, as of December 31, 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




CDC Holdings Ltd	1,258,225	⁽²⁾	10.87	%

Robi Hartman	1,751,074		15.13	%

(1)	Percentage ownership is based on 11,576,539 shares outstanding as of December 31, 2004.

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

As of December 31, 2004, approximately 90% of the outstanding Ordinary Shares of the Company were held of record by approximately 50 holders registered on the books of the Company’s United States transfer agent with addresses in the United States. The Company believes 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 our office space located in Ramat Gan, Israel was leased from West End, a company that is owned by Robi Hartman, the Company’s liquidator and at the time its Chief Executive Officer and Chairman. As of April 1, 2003, this lease was assumed by Enargis which sublet 35% of the premises to us at an annual cost of approximately $12,000 which was reduced by 50% to $6,000 per annum with effect from August 2004, following our entry into voluntary liquidation proceedings in July 2004 and the other 50%, $6,000, was postponed to until receipts of proceeds from the sale of StoreAge or Enargis.

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 liquidator and at the time 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. Statements and Other Financial Information.

See pages F-1 – F-27 of the Company’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 shareholders have approved the Company’s voluntary liquidation proceeding See Item 3 – Key Information, D. Risk Factors “Voluntarily liquidation of the Company” and Item 4 – Information on the Company, A. Entry into Voluntary Liquidation. Except for this, there have been no significant changes since December 31, 2004, 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 IISLF.PK. 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. From January 23, 2003 until August 23, 2004, the Company’s Ordinary Shares traded on the OTC Bulletin Board. Since August 24, 2004, the Company’s Ordinary Shares have traded on the Pink Sheets Electronic Quotation Service (“Pink Sheets”).

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, by the OTC Bulletin Board or by the Pink Sheets since January 23, 2003, for the five most recent full financial years and the quarterly high and low closing sales price quotes for the three 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 Pink Sheet s for the most recent six months.

	High		Low




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

Year ended December 31, 2004	$	0.73	$	0.9

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

2004
First Quarter	$	0.73	$	0.39
Second Quarter	$	0.58	$	0.20
Third Quarter	$	0.25	$	0.103
Fourth Quarter	$	0.14	$	0.09

Most Recent Six Months

December 2004	$	0.11	$	0.09
January 2005	$	0.11	$	0.09
February 2005	$	0.14	$	0.10
March 2005	$	0.15	$	0.09
April 2005	$	0.11	$	0.09
May 2005	$	0.11	$	0.09

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, 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 is 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, certain 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:

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

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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

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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:

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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

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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.

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 50 days have passed from the time that a proposal for approval of the merger has been filed with the Israeli Registrar of Companies, certain notification and information have been provided to debtors and at least 30 days have passed from the shareholders approval of the merging companies.

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 45% 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.

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.

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).

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. To the extent that the summary is based on new tax legislation yet to be judicially or administratively interpreted, we cannot be sure that the views expressed will accord with any future interpretation by the Israeli tax authorities or courts.

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. Accordingly, you should consult your tax advisor as to the particular tax consequences of an investment in our Ordinary Shares.

General Corporate Tax Structure

On July 24, 2002, the Israeli Knesset enacted income tax reform legislation, commonly referred to as the “2003 Tax Reform”. The 2003 Tax Reform has introduced fundamental and comprehensive changes into Israeli tax laws. Most of the legislative changes took effect on January 1, 2003. The 2003 Tax Reform has introduced a transition from a primarily territorial-based tax system to a personal-based system of taxation with respect to Israeli residents. The 2003 Tax Reform has also resulted in significant amendments to the international taxation provisions, and new provisions concerning the taxation of capital markets. Under the 2003 Tax Reform legislation the Ordinary Shares are no longer regarded and defined as “foreign traded securities” and thus certain associated Israeli tax aspects will accordingly be subject to change as discussed below.

A relatively short time after the 2003 Tax Reform, the Knesset approved on July 25, 2005, the second and third readings of the Income Tax Ordinance Amendment (No. 147 and Ad Hoc Provision) Law, 2005 (hereafter – the 2005 Amendment). The 2005 amendment was an additional update of corporate tax rates that were previously determined in the 2003 Tax Reform , and determines that the rate of corporate tax will be reduced as from January 1, 2006. Consequently income not eligible for “Approved Enterprise” benefits was taxed in 2006 at the regular corporate rate of 31% and in 2007 is taxed at a regular corporate tax rate of 29%. The tax rate will be reduced in subsequent tax years as follows: in 2008 27%, in 2009 26% and in 2010 and thereafter 25%.

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.

The tax reform also substantially changed the system of taxation of capital gains. Capital gains tax is reduced to 25%, except with respect to capital gains from marketable securities, with transitional provisions for assets acquired prior to January 1, 2003. For further discussion see below “Capital Gains Tax”.

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

Pursuant to the Law for the Encouragement of Industry (Taxes), 1969, also known as 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 preferential corporate tax benefits:

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

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

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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:

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There is a special tax adjustment for the preservation of equity whereby 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 (“CPI”).

Capital Gains Tax

Capital gains tax is imposed on the disposal of capital assets by an Israeli resident, and on the disposal of such assets by a non- Israel resident if those assets are: (i) located in Israel; (ii) are shares or a right to a share in an Israeli resident corporation; or (iii) rights in a foreign corporation the majority of whose assets is directly or indirectly, rights to assets located in Israel (with respect to the applicable portion of the capital gain). The Israeli Tax Ordinance distinguishes between “Real Gain” and the “Inflationary Surplus”. Real Gain is the excess of the total capital gain over Inflationary Surplus computed generally on the basis of the increase in the Israeli CPI between the date of purchase and the date of disposal.

The capital gain accrued by individuals on the sale of an asset purchased on or after January 1, 2003 will be taxed at the rate of up to 20%. However, if the individual shareholder is a “Controlling Shareholder” (i.e., a person who holds, directly or indirectly, alone or together with others, 10% or more of one of the Israeli resident company’s means of control at the time of sale or at any time during the preceding 12-month period) such gain will be taxed at the rate of 25%. In addition, capital gain derived by an individual claiming deduction of financing expenses in respect of such gain will be taxed at the rate of up to 25%. The real capital gain derived by corporation will be generally subject to tax at the rate of 25%. However, the real capital gain derived from the sale of securities, as defined in Section 6 of the Inflationary Adjustment Law, by a corporation, which was subject upon December 31, 2005 to the provisions of Section 6 of the Inflationary Adjustment Law, will be taxed at the corporate tax rate (29% in 2007).

The capital gains accrued at the sale of an asset purchased prior to January 1, 2003 will be subject to tax at a blended rate. The marginal tax rate for individuals (up to 48% in 2007) and the regular corporate tax rate for corporations (29% in 2007) will be applied to the gain amount which bears the same ratio to the total gain realized as the ratio which the holding period commencing at the acquisition date and terminating on January 1, 2003 bears to the total holding period. The remainder of the gain realized will be subject to capital gains tax at the rates applicable to an asset purchased after January 1, 2003 (see aforementioned). With respect to traded securities detailed rules apply. Individual and corporate shareholders dealing in securities in Israel are taxed at the tax rates applicable to business income (in 2007 – 29% tax rate for a corporation and a marginal tax rate of up to 48% for an individual).

Notwithstanding the foregoing, if the shareholder is a non-Israeli resident, then such taxation is subject to the provisions of any applicable double tax treaty. Moreover, capital gains derived from the sale of the Ordinary Shares by a non-Israeli shareholder may be exempt under the Israeli income tax ordinance from Israeli taxation provided the following cumulative conditions are met: (i) the Shares were purchased upon or after the registration of the Ordinary Shares at the stock exchange, (ii) the seller does not have a permanent establishment in Israel to which the derived capital gain is attributed, and (iii) if the seller is a corporation, less than 25% of its means of control are held by Israeli resident shareholders. In addition, the sale of the Shares may be exempt from Israeli capital gains tax under an applicable tax treaty. Thus, the U.S.-Israel Double Tax Treaty (“the US Treaty”) exempts U.S. resident from Israeli capital gain tax in connection with such sale, provided that: (i) the U.S. resident controlled, either directly or indirectly, less than 10% of an Israeli resident company’s voting power at any time within the 12–month period preceding such sale; (ii) the seller, if being an individual, is present in Israel for a period or periods of less than 183 days during the taxable year; and (iii) the capital gain from the sale was not derived through a permanent establishment of the U.S. resident in Israel.

Either the seller, the Israeli stockbrokers or financial institution through which the sold securities are held is obliged, subject to the above mentioned exemptions, to withhold tax upon the sale of securities from the real capital gain at the rate of 25% in respect of a corporation and 20% in respect of an individual

Generally, a detailed return, including a computation of the tax due, should be submitted to the Israeli Tax Authority, within 30 days of the completion of a transaction and advanced payment amounting to the tax liability arising from the capital gain is due. At the sale of traded securities, detailed rules apply, by which, inter alia, the aforementioned detailed return, upon fulfillment of certain conditions, may not be submitted and the advanced payment should not be paid if all tax due was withheld at the source according to applicable provisions of the Israeli income tax ordinance and regulations promulgated thereunder. Capital gains are also reportable on the annual income tax return.

Dividends

The following Israeli tax consequences shall apply in the event of actual payment of any dividends on ordinary shares.

Income from dividends in 2007 and thereafter, other than bonus shares (stock dividends), to Israeli residents who purchased our Shares will generally be subject to income tax at a rate of 20% for individuals, or 25% if the dividends recipient is a Controlling Shareholder (as defined above) and will be exempt from income tax for Israeli corporations (as long as the corporation did not generate income from an approved enterprise)..

Non-residents of Israel (both individuals and corporations) are subject to income tax on income accrued or derived from sources in Israel, including dividends from Israeli corporations. The distribution of dividend, other than bonus shares (stock dividends), sourced from non-Approved Enterprise income, to non-residents of Israel will generally be subject to income tax at a rate of 20% (or 25% for a shareholder that is considered a Controlling Shareholder (as described above) by way of a tax withholding, unless a lower rate is stipulated by a treaty between Israel and the shareholder’s country of residence.

Generally, under the US Treaty the maximum rate of withholding tax on dividends paid to a shareholder who is a resident of the United States (as defined in the US Treaty) will be 25%. Due to the fact that a tax rate of 25% is higher than the maximum Israeli tax rate on dividends pursuant to the 2005 Amendment, the maximum tax rate should be 20%. However, when a U.S. tax resident corporation is the recipient of the dividend, the rate on a dividend out of regular (sourced from non-Approved Enterprise income) profits may be reduced to 12.5% under the treaty, where the following conditions are met:

(a)	the recipient corporation owns at least 10% of the outstanding voting rights of the Company for all of the period preceding the dividend during the Company’s current and prior tax year; and

(b)	generally not more than 25% of the gross income of the paying corporation for its prior tax year consists of certain interest and dividend income components.

Otherwise, the usual rates as described above would apply.

In addition, if an Individual shareholder is considered a Controlling Shareholder (as defined above) at any time during the 12-month period preceding such sale, the tax rate on the dividend (not source from Approved Enterprise income) will be 25%. The withholding tax by the Company on such dividend would remain 20%.

United States Federal Income Tax Consequences

TO ENSURE COMPLIANCE WITH THE REQUIREMENTS IMPOSED BY THE INTERNAL REVENUE SERVICE, WE INFORM YOU THAT ANY TAX STATEMENT HEREIN IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY ANY TAXPAYER FOR THE PURPOSE OF AVOIDING ANY TAX-RELATED PENALTIES UNDER THE UNITED STATES INTERNAL REVENUE CODE. ANY TAX STATEMENT HEREIN WAS WRITTEN IN CONNECTION WITH THE MARKETING OR PROMOTION OF THE TRANSACTIONS OR MATTERS TO WHICH THE STATEMENT RELATES. EACH TAXPAYER SHOULD SEEK ADVICE BASED ON THE TAXPAYER’S PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR.

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:

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broker dealers,

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financial institutions,

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certain insurance companies,

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investors liable for alternative minimum tax,

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tax exempt organizations,

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

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

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

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

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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:

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

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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;

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

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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. Subject to the discussion below under the heading “Passive Foreign Investment Companies”, 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.

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. 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.

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.

The reduced rate applicable to dividend distributions 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, until we complete a merger another operating business, 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:

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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;

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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;

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

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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 may be 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 100 F. Street, N.E., Room 1580, Washington, D.C. 20549 and at the SEC’s regional offices. 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. 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, 2004. The market values for foreign exchange risk are computed based on spot rates in effect at December 31, 2004. The market values that result from these computations are compared to the market values of these financial instruments at June 30, 2004. 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

Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 20F. Based on that evaluation, our chief executive officer and chief financial officer has concluded that our disclosure controls and procedures were not effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 (“Exchange Act”) was recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms and to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act was accumulated and communicated to our management, including chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a reasonable possibility that a material misstatement of our annual financial statements would not be prevented or detected. As of the end of the period covered by this Annual Report on Form 20F, we have concluded that our internal control over financial reporting was ineffective and that we had material weaknesses as set out below in this Item 15.

1. Disclosure Controls
From July 2004 until April 2007, the Company was placed in voluntary liquidation and had no functioning board of directors or board-related committees as an outside liquidator managed all of the Company’s affairs. During this period, we ceased preparing audited financial statements which resulted in the Company being delinquent with respect to its annual report filing obligations with the SEC. Consequently, the Company’s disclosure controls and procedures were not effective to ensure that 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 Commission’s rules and forms and to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including chief executive officer and chief financial officer, as appropriate to allow timely decisions.

2. 2003 Restatement
In connection with the preparation and filing of the Annual report on Form 20F in June 2004, the Company’s controls over period end reporting were not operating effectively due to the imminent commencement of liquidation proceedings at that time. These ineffective controls lead to certain errors at the date of the filing. These errors resulted in the need for restatements as described in Note 1(a)(2) to the financial statements.

Changes in Internal Control over Financial Reporting

Following the cancellation of our voluntary liquidation proceedings in April 2007, we have taken certain actions to remediate our material weaknesses including:

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Re-establishing a board of directors including an audit committee; and

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Creating an internal audit function; and

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Hiring a professional services firm to perform accounting and financial reporting functions.

As a result of these and other measures we have taken to date, we believe the material weaknesses related to the financial statement close process reported in this Annual Report on Form 20F, have been remediated, as of the date of this filing.

ITEM 16A.

AUDIT COMMITTEE FINANCIAL EXPERT

For the year 2004, as we entered voluntary liquidation in July 2004, we did not have a properly functioning audit committee. None of the members of our audit committee met the definition of an audit committee financial expert, as defined in Item 16A (a) of Form 20-F. This was due to our inability to attract a director with the requisite financial knowledge and experience.

From July 2004 we were in involuntary liquidation and had no functioning board of directors or board of directors’ committees.

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 intends to address the adoption of such a code with the Board of Directors in the future.

ITEM 16C.

AUDIT 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.

	Year Ended December 31,
	2003		2004
Services Rendered	Fees		Fees


Audit (1)	$	20,000	$	43,000
Audit-related (2)	$	0	$	0
Tax (3)	$	0	$	2,000
Other
Total	$	20,000	$	45,000

(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 had not adopted a policy and procedures for the pre-approval of audit and non-audit services rendered by our independent public accountants.

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

Not applicable.

PART III

Item 17.

FINANCIAL STATEMENTS

Not applicable.

Item 18.

FINANCIAL STATEMENTS

Attached. See Item 19(a).

Item 19.

FINANCIAL STATEMENTS AND EXHIBITS






(a)	Index to Financial Statements of the Company:	Page
	Report of Independent Auditors on
	Financial Statements of the Company	F-2

	Balance Sheets at December 31, 2004 and 2003	F-3

	Statements of Operations for the years ended
	December 31, 2004, 2003 and 2002	F-4

	Statements of Changes in Shareholders' Equity (capital deficiency)
	for the years ended December 31, 2004, 2003 and 2002	F-5

	Statements of Cash Flows for the years ended
	December 31, 2004, 2003 and 2002	F-6 - F-7

	Notes to the Financial Statements	F-8 - F-27

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.

SIGNATURES

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

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

By: /s/ Robi Hartman
——————————————
Robi Hartman, Chief Executive Officer

Date: August 29, 2007

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

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.**

4.2

4.3

8.1

List of significant subsidiaries of the Company.

12.1

Certification by Chief Executive Officer and Acting Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

13.1

Certification by Chief Executive Officer and Acting Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

* 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 LIMITED
(An Israeli corporation)
FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2004

I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
(An Israeli corporation)
FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2004
TABLE OF CONTENTS

	Page




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	F-2
FINANCIAL STATEMENTS:
Balance sheets	F-3
Statements of operations	F-4
Statements of changes in shareholders' equity (capital deficiency)	F-5
Statements of cash flows	F-6-F-7
Notes to financial statements	F-8-F-27

The amounts are stated in U.S. dollars ($) in thousands.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders of

I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED

We have audited the balance sheets of I.I.S. Intelligent Information Systems Limited (the “Company”) as of December 31, 2004, and 2003 and the statements of operations, of changes in shareholders’ equity (capital deficiency) and of cash flows for each of the two years in the period ended December 31, 2004. These financial statements are the responsibility of the Company’s Board of Directors and management. Our responsibility is to express an opinion on these financial statements based on our audits.

We did not audit the financial statements of an associated company, the Company’s share in losses of which is $20,000 in the year ending December 31, 2003. Those financial statements were audited by other independent registered public accounting firm whose report thereon has been furnished to us, and our opinion expressed herein, insofar as it relates to the amounts included for this company, is based solely on the report of the other independent registered public accounting firm.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Company’s Board of Directors and 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 financial statements referred to above, present fairly, in all material respects, the financial position of the Company as of December 31, 2004, and 2003 and the results of its operations and cash flows for each of the two years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.

Tel-Aviv, Israel
August 29, 2007

Kesselman & Kesselman
Certified Public Accountant (Isr.)
A member of PricewaterhouseCoopers
International Limited

F - 2

I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
(An Israeli corporation)
BALANCE SHEETS
(U.S. dollars in thousands)

	December 31
	2004			2003



A s s e t s
Current assets:
Cash and cash equivalents	$	93		$	133
Restricted bank deposit					48
Accounts receivables		10			140


T o t a l current assets		103			321


Funds in respect of employee rights upon retirement		2			5

Fixed assets, net					9


T o t a l assets	$	105		$	335


Liabilities and shareholders' equity
(net of capital deficiency)

Current liabilities -
accounts payable and accruals	$	189		$	208


Long-term liabilities -
liability for employee rights upon retirement		2			9


T o t a l liabilities		191			217


Commitments and contingent liabilities, note 5

Shareholders' equity (capital deficiency):
Ordinary shares of NIS 0.003 par value at
December 31, 2004 and 2003:
Authorized - 16,666,667 shares;
Issued and outstanding - 11,576,539 shares		55			55
Additional paid-in capital		41,417			41,417
Accumulated deficit		(41,558	)		(41,354	)


T o t a l shareholders' equity (capital deficiency)		(86	)		118


T o t a l liabilities and shareholders' equity (net of capital deficiency)	$	105		$	335

——————————————
Robi Hartman
Chairman of the Board,
Chief Executive Officer
and Chief Financial Officer

——————————————
Aharon Jacobowitz
Director

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

F - 3

I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
(An Israeli corporation)
STATEMENTS OF OPERATIONS
(U.S. dollars in thousands, except share and per share data)

	Year ended December 31
	2004			2003			2002



Revenues:
Products, note 10							$	62
Research and development services to
an associated company								145

								207

Cost of revenues:
Products								(38	)
Research and development services to
an associated company								(51	)

								(89	)

Gross profit								118

Research and development expenses								(548	)
Selling and marketing expenses								(49	)
General and administrative expenses	$	(200	)	$	(441	)		(577	)
Impairment of goodwill								(186	)
Non-recurring income - net								122
Income from a lawsuit settlement, note 5e					330

Operating loss		(200	)		(111	)		(1,120	)
Financial expenses - net		(4	)		(3	)

		(204	)		(114	)		(1,120	)
Share in losses of an associated company					(20	)		(1,250	)

Net loss	$	(204	)	$	(134	)	$	(2,370	)


Net loss per share of ordinary shares -
Basic and diluted	$	(0.02	)	$	(0.01	)	$	(0.21	)

Weighted average number of ordinary shares used in
computing loss per ordinary shares
(in thousands) -
Basic and diluted		11,577			11,577			11,485

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

F - 4

I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
(An Israeli corporation)
STATEMENTS OF SHAREHOLDERS’ EQUITY (CAPITAL DEFICIENCY)
(U.S dollars in thousands, except share data)

	Ordinary shares
	Number of shares		Amount		Additional paid-in capital			Deferred stock compensation			Accumulated deficit			Total shareholders' equity (capital deficiency)



Balance as of January 1, 2002		11,432,577	$	55	$	41,419		$	(89	)	$	(38,850	)	$	2,535

Change during 2002:
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
Net loss												(2,370	)		(2,370	)


Balance as of December 31, 2002		11,576,539		55		41,417			-,-			(41,220	)		252

Change during 2003 -

Net loss												(134	)		(134	)


Balance as of December 31, 2003		11,576,539		55		41,417			-,-			(41,354	)		118

Change during 2004 -

Net loss												(204	)		(204	)


Balance as of December 31, 2004		11,576,539	$	55	$	41,417			-,-		$	(41,558	)	$	(86	)

* Represents an amount lower than $1 thousand.

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

F - 5

(continued – 1)

I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
(An Israeli corporation)
STATEMENTS OF CASH FLOWS
(U.S dollars in thousands)

	Year ended December 31
	2004			2003			2002



CASH FLOWS FROM OPERATING ACTIVITIES:

Net loss	$	(204	)	$	(134	)	$	(2,370	)
Adjustments required to reconcile net loss to net cash used in
operating activities:
Depreciation					6			33
Impairment of goodwill								186
Write-off of fixed assets		9			12
Amortization of deferred stock compensation								89
Changes in accrued liability for employee rights
upon retirement		(7	)		3			(10	)
Loss (gain) on amounts funded in respect of employee
rights upon retirement		3			(1	)
Share in losses of an associated company					20			1,250
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable		130			(92	)		95
Decrease in trade payable					(77	)		(42	)
Decrease in accounts payable and accruals		(19	)		(6	)		(333	)
Finance income derived from U.S. dollar exchange
rate changes					(4	)
Other								1

Net cash used in operating activities		(88	)		(273	)		(1,101	)


CASH FLOWS FROM INVESTING ACTIVITIES:

Proceeds from sale of property and equipment					9			5
Purchase of property and equipment								(7	)
Proceeds from a restricted deposit		48


Net cash provided by (used in) investing activities	$	48		$	9		$	(2	)

F - 6

(concluded – 2)

I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
(An Israeli corporation)
STATEMENTS OF CASH FLOWS
(U.S dollars in thousands)

	Year ended December 31
	2004			2003			2002



CASH FLOW FROM FINANCING ACTIVITIES:
Exercise of warrants							$	22
Repayment of long-term bank loans								(10	)
Issuance of convertible debentures, net								(24	)

		-,-			-,-			(12	)


DECREASE IN CASH AND CASH EQUIVALENTS	$	(40	)	$	(264	)		(1,115	)

BALANCE OF CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		133			397			1,512

BALANCE OF CASH AND CASH EQUIVALENTS
AT END OF YEAR	$	93		$	133		$	397


Supplementary information on activities not involving cash flows - fixed assets transfer to Enargis Storage Solutions Ltd. (see note 2a)		-,-		$	20			-,-


Supplemental disclosure of cash flows activities -
interest paid during the year		-,-		$	4		$	8

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

F - 7

I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
(An Israeli corporation)
NOTES TO FINANCIAL STATEMENTS

NOTE 1

–

SIGNIFICANT ACCOUNTING POLICIES:

General:

Operations

Through December 2002, I.I.S. Intelligent Information Systems Limited. (“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 other than managing its holdings in StoreAge Networking Technologies Ltd. (“StoreAge”) and Enargis Storage Solutions Ltd. (“Enargis”) (see note 2 below).

On July 29, 2004, the Company’s shareholders resolved to place the Company in a voluntary liquidation.

On April 17, 2007, the Company’s general meeting of shareholders duly approved the termination of the Company’s voluntary liquidation.

Since the voluntary liquidation was not considered imminent, these financial statements are presented on a going-concern basis.

Liability Recognition for Certain Employee Benefits

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 thousands 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”).

F - 8

I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
(An Israeli corporation)
NOTES TO FINANCIAL STATEMENTS

NOTE 1

–

SIGNIFICANT ACCOUNTING POLICIES (continued):

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

			Utilized
	Original accruals		Cash		Non - cash		Balance as of December 31, 2003
	U.S. dollar in thousands


Employees termination
benefits	$	35	$	35				-,-
Amortization of deferred
stock compensation		25			$	25		-,-

	$	60	$	35	$	25		-,-

Accounting principles

The financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).

Functional currency

The currency of the primary economic environment in which the operations of the Company are conducted is the U.S. dollar (“dollar”; “$”). Most of the Company’s revenue and expenses are incurred in dollars. The Company’s deposits are mostly in dollars. Thus, the functional currency of the Company is the dollar.

Transactions and balances originally denominated in dollars are presented at their original amounts. Balances in non-dollar currencies are translated into dollars using historical and current exchange rates for non-monetary and monetary balances, respectively. Non-dollar transactions reflected in the statements of operations are translated into dollars using exchange rates at the transaction dates or average rates. Currency transaction gains or losses are carried to financial income or expenses, as appropriate.

F - 9

I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
(An Israeli corporation)
NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 1

–

SIGNIFICANT ACCOUNTING POLICIES (continued):

Use of estimates in preparation of financial statements

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

Cash equivalents

The Company considers all highly liquid investments, which are comprised of short-term bank deposits with an original maturity date of up to three months) that are not restricted as to withdrawal or use, to be cash equivalents.

Deferred income taxes

The Company accounts for income taxes in accordance with FASB Statement No. 109, “Accounting for 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 tax balances are computed using the tax rates expected to be in effect at time when these differences reverse.

Valuation allowances in respect of the deferred tax assets are provided when it is more likely than not that all or a portion of the deferred income tax assets will not be realized. The Company has provided a full valuation allowance with respect to its deferred tax assets.

Investments in associated companies

Investments in associated companies are investments in companies held to the extent of 20% or more which the Company can exercise significant influence over operating and financial policy.

As the Company has no guaranteed obligations and not otherwise committed to provide further financial support for any of the associated companies, the Company discontinued applying the equity method when the investment account was reduced to zero.

F - 10

I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
(An Israeli corporation)
NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 1

–

SIGNIFICANT ACCOUNTING POLICIES (continued):

Fixed assets:

Fixed assets are stated at cost.

The assets are depreciated by the straight-line method, on basis of their estimated useful life.

The principal annual rates of depreciation are as follows:

						%




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

Impairment of long-lived assets

Under FAS 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”(“FAS 144”), the Company reviews long-lived assets, to be held and used, for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Under FAS 144, if the sum of the expected future cash flows (undiscounted and without interest charges) of the long-lived assets is less than the carrying amount of such assets, an impairment loss would be recognized, and the assets are written down to their estimated fair values.

During the years ended December 31, 2004 and 2003, the Company abandoned some of its office furniture and equipment. Accordingly, the Company recorded an impairment charge in the amount of $9,000 and $12,000 respectively.

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.

F - 11

I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
(An Israeli corporation)
NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 1

–

SIGNIFICANT ACCOUNTING POLICIES (continued):

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.

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 in the amount of $186,000 was impaired and written off.

Revenue recognition

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

Research and development services to associated company 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 2a).

Revenues from software licensing 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 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.

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.

F - 12

I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
(An Israeli corporation)
NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 1

–

SIGNIFICANT ACCOUNTING POLICIES (continued):

Net loss per share

Basic net loss per share is computed by dividing net loss by the weighted average number of shares outstanding during the year.

Diluted net loss per share are computed by dividing net loss by the weighted average number of shares outstanding during the year, taking into account the potential dilution that could occur upon the exercise of options granted under employee stock option plans, using the treasury stock method. In the years ended December 31, 2004, 2003 and 2002 all outstanding stock options have been excluded from the calculation of the diluted net loss per share since their effect was anti-dilutive.

The diluted loss per share does not include options of the Company in the amount of 406,550, 774,717 and 1,125,674 for the years 2004, 2003 and 2002, respectively.

Accounting for stock based compensation

Stock options granted to employees are accounted for under the recognition and measurement principles of APB No. 25, “Accounting for Stock Issued to Employees”, and related interpretations. Under APB 25, compensation cost for employee stock option plans is measured using the intrinsic value based method of accounting.

Accordingly, the difference, if any, between the quoted market price of the ordinary shares on the date of grant of the options and the exercise price of such options is charged on the date of grant to shareholders’ equity under “deferred compensation”, and thereafter amortized by the accelerated amortization method, against income, over the expected service period (up to four years).

FAS 123, “Accounting for Stock-Based Compensation”, established a fair value based method of accounting for employee stock options or similar equity instruments, and encourages adoption of such method for stock compensation plans. However, it also allows companies to continue to account for those plans using the accounting treatment prescribed by APB 25. The Company has elected to continue accounting for employee stock option plans under APB 25, and has accordingly complied with the disclosure requirements set forth in FAS 123, as amended by FAS 148, for companies electing to apply APB 25.

F - 13

I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
(An Israeli corporation)
NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 1

–

SIGNIFICANT ACCOUNTING POLICIES (continued):

The following table illustrates the effect on net income and earnings per share assuming the Company has applied the fair value recognition provisions of FAS 123 to its stock-based employee compensation:

	Year ended December 31,
	2003			2002



Net loss available to common stock - as reported	$	(134	)	$	(2,370	)
Add: Stock-based employee compensation - intrinsic value					89
Deduct: Stock-based employee compensation - fair value		(103	)		(187	)


Pro forma net loss	$	(237	)	$	(2,468	)

Basic and diluted loss per share of ordinary share as reported	$	(0.01	)	$	(0.21	)

Basic and diluted pro forma net loss per share of
Ordinary share	$	(0.02	)	$	(0.23	)

The Company did not disclose pro forma data for the year ended December 31, 2004, as required by SFAS 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), as amended by FAS 148, assuming it had accounted for employee share option grants using the fair value-based method defined in SFAS 123, since the effect on net loss and net loss per share assuming it had applied the fair value recognition provisions is immaterial.

The fair value for options granted in the years ended December 31, 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:




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

F - 14

I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
(An Israeli corporation)
NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 1

–

SIGNIFICANT ACCOUNTING POLICIES (continued):

Concentration of credit risks

Financial instruments that subject the Company to credit risk consist primarily of cash and cash equivalents, which are deposited in major financial institutions.

Newly issued and recently adopted accounting pronouncements:

In December 2004, the Financial Accounting Standards Board (“FASB”) issued the revised Statement of Financial Accounting Standards (“FAS”) No. 123, Share-based payment (FAS 123R), which addresses the accounting for share-based payment transactions in which the Company obtains employee services in exchange for (a) equity instruments of the Company or (b) liabilities that are based on the fair value of the Company’s equity instruments or that may be settled by the issuance of such equity instruments. This Statement eliminates the ability to account for employee share-based payment transactions using APB Opinion No. 25, Accounting For Stock Issued To Employees, and requires instead that such transactions be accounted for using the grant-date fair value based method. This Statement will be effective as of the beginning of the first interim or annual reporting period that begins July 1, 2005. Early adoption of FAS 123R is encouraged. On April 15, 2005, the Securities and Exchange Commission approved a new rule, under which FAS 123R is effective for public companies at the beginning of their next fiscal year that begins after June 15, 2005 (first quarter of 2006 for the company). This Statement applies to all awards granted or modified after the Statement’s effective date. In addition, compensation cost for the unvested portion of previously granted awards that remain outstanding on the Statement’s effective date shall be recognized on or after the effective date, as the related services are rendered, based on the awards’ grant-date fair value as previously calculated for the pro-forma disclosure under FAS 123. The Company expects that upon the adoption of FAS 123R, it will apply the modified prospective application transition method, as permitted by the Statement. Under such transition method, upon the adoption of FAS 123R, the Company’s financial statements for periods prior to the effective date of the Statement will not be restated.

In December 2004, the FASB issued FAS No. 153, “Exchanges of Non-monetary Assets –An Amendment of APB Opinion No. 29” (FAS 153). FAS 153 amends APB Opinion No. 29, “Accounting for Non-monetary Transactions” (Opinion 29). The amendments made by FAS 153 are based on the principle that exchanges of non-monetary assets should be measured based on the fair value of the assets exchanged. Further, the amendments eliminate the exception for non-monetary exchanges of similar productive assets and replace it with a general exception for exchanges of non-monetary assets that do not have commercial substance. The provisions in FAS 153 are effective for non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005 (July 1, 2005 for the Company). Early application of the FAS 153 is permitted. The provisions of this Statement shall be applied prospectively. The Company does not expect the adoption of FAS 153 to have a material effect on the Company’s financial statements or its results of operations.

F - 15

I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
(An Israeli corporation)
NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 1

–

SIGNIFICANT ACCOUNTING POLICIES (continued):

In May 2005, the FASB issued FAS No. 154, “Accounting Changes and Error Corrections” (FAS 154). FAS 154 is a replacement of Accounting Principles Board Opinion (“APB”) No. 20 and FASB Statement No. 3. FAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes retrospective application as the required method for reporting a change in accounting principle. FAS 154 also requires that a change in depreciation, amortization, or depletion method for long-lived, nonfinancial assets be accounted for as a change in accounting estimate effected by a change in accounting principle. The Statement carries forward the guidance contained in APB No. 20 for reporting the correction of an error in previously issued financial statements and a change in accounting estimate. FAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005 (January 1, 2006 for the Company).

In June 2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes –an interpretation of FAS 109” (FIN 48). This financial interpretation clarifies the accounting for uncertainty in income taxes, and prescribes a recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on various related matters such as de-recognition, interest and penalties and disclosure. The provisions of FIN 48 are effective for fiscal years beginning January 1, 2007.

In September 2006, the FASB issued FAS 157, “Fair Value Measurements” (FAS 157). This standard establishes a framework for measuring fair value and expands related disclosure requirements; however, it does not require any new fair value measurement. The provisions of FAS 157 are effective for fiscal years beginning January 1, 2008. The Company is currently evaluating the impact of adopting of FAS 157 on its financial statements and results of operations.

In September 2006, the SEC issued Staff Accounting Bulletin (SAB) 108, which expresses the Staff’s views regarding the process of quantifying financial statement misstatements. The bulletin was effective as of the year beginning January 1, 2006. The implementation of this bulletin had no impact on the Company’s financial statements.

In February 2007, the FASB issued FAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities”(FAS 159). This standard permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. The provisions of FAS 159 are effective for fiscal years beginning January 1, 2008. The Company is currently evaluating the impact of adopting FAS 159 on its financial position, cash flows and results of operations. The Company does not expect the impact to have a material effect on its financial position, cash flows and results of operations.

F - 16

I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
(An Israeli corporation)
NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 2

–

CERTAIN TRANSACTIONS AND INVESTMENTS:

Investment in Enargis

On March 31, 2003, the Company transferred iSCSI activities to a newly formed company –Enargis. Following such transfer, the Company held 25% in Enargis. The carrying amount of the investment in Enargis following the transaction amounted to approximately $20,000, equaling the carrying amount of assets transferred, and was subsequently reduced to zero during the year ended December 31, 2003 due to the Company’s share in Enargis losses.

On May 15, 2007, the Company, together with all the other shareholders of Enargis, transferred all of its 25% holdings in Enargis to West End Technology Investments Ltd. (a company controlled by the CEO and Chairman of the Board) for no consideration.

Investment in StoreAge

As of January 1, 2002 and through October 2005, the Company held 38.9% of StoreAge. StoreAge is an Israeli company, which is engaged in the development and marketing of products based on its SAN Virtualization technology.

In October 2005, all classes of preferred shares of StoreAge and outstanding bridge loans were converted into ordinary shares of StoreAge. Following this conversion the Company held 13% of the issued and ordinary shares of StoreAge.

The carrying amount of the investment in StoreAge was reduced to zero during the year ended December 31, 2002 due to the Company’s share in StoreAge’s losses.

In March 2006, the Company’s holdings in Storage were further diluted to 12.68% due to share issuance by StoreAge to a third party.

In October 2006 all the shareholders of StoreAge, including the Company, signed a share purchase agreement with LSI Logic Corporation (“LSI”) for the sale of all issued and outstanding shares of StoreAge to LSI. The Company’s share of the proceeds received upon the closing of the transaction in November 2006, was $5,416,692, of which $703,793 is held in escrow to satisfy certain possible future claims for a period of 18 months following the closing.

The Company recognized a net gain of $4,713,000 in 2006 on the said sale.

F - 17

I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
(An Israeli corporation)
NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 2

–

CERTAIN TRANSACTIONS AND INVESTMENTS (continued):

Memorandum Of Agreement (“MOA”) with Witech Communications Ltd. (“Witech”)

On February 20, 2007, the Company signed a MOA with Witech with respect to a contemplated merger between the Company and Witech, under which the Company is to acquire full control and ownership of Witech, in consideration of 50% of Company’s shares. In addition, the Company is to provide certain loans to Witech (see below). The closing of the merger with Witech is subject to numerous terms and conditions, among others: satisfaction, in the sole discretion of the Company, of Company’s due diligence requirements, including technical, financial and legal diligence, the signing of mutually acceptable Final Agreements containing additional provisions customary in transactions of this type, obtaining of a ruling from the Israeli Tax Authority confirming that the Merger will be tax-free subject to reasonable conditions set forth therein, the mutual execution of employment agreements between the Company and the senior management of Witech who will become the Company’s employees, the termination of the Company’s voluntary liquidation proceedings, the approval of the Company’s Board of Directors and general meeting of shareholders. In addition and without derogating from the aforesaid, the Company shall not be obligated to consummate the contemplated transaction if at any time before the consummation of the merger of Witech with and into the Company there is any effect, change, event, circumstance or condition which, when considered with all other effects, changes, events, circumstances or conditions, has or would reasonably be expected to have a material adverse effect on the business, assets (including intangible assets), prospects (including due to the loss or resignation, or notice of loss or resignation, of key employees of Witech and its subsidiary), results of operations or financial condition of Witech and its subsidiary taken together as a whole. If the Tax Ruling is subject to unreasonable conditions, the Company and Witech will negotiate in good faith an alternative structure for the transaction.

From April 2007 through August 2007, according to the MOA, the Company provided a loan to Witech in the amount of $3,200,000. The above mentioned loans bear an annual interest rate of LIBOR plus 5%, whilst in the event that the merger is not consummated, the interest on the loans will be increased to LIBOR plus 10% (or the maximum rate permitted by law, whichever is lower) retroactively to the date it was provided to Witech.

If the merger is not consummated, Witech may have difficulty in repaying the loans provided by the Company and, if Witech is in default, the Company may not be able to recoup its loans through exercise of the charge on Witech’s assets.

F - 18

I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
(An Israeli corporation)
NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 3

–

FIXES ASSETS:

Composition of assets, and the accumulated depreciation and amortization thereon, grouped by major classifications are as follows:

	December 31
	2003		2002
	U.S. dollar in thousands


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 year ended December 31, 2003 and 2002 amounted to approximately $6 thousands and $33 thousands, respectively.

NOTE 4

–

EMPLOYEE RIGHTS UPON RETIREMENT

Israeli law generally requires payment of severance pay and/or pensions upon dismissal of an employee or upon termination of employment in certain other circumstances. The severance pay liabilities are fully provided for in these financial statements, as if it was payable at each balance sheet date on an undiscounted basis, based upon the number of years of service and the most recent monthly salary of the Company’s employee.

NOTE 5

–

COMMITMENTS AND CONTINGENT LIABILITIES:

F - 19

I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
(An Israeli corporation)
NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 5

–

COMMITMENTS AND CONTINGENT LIABILITIES (continued):

At the Company’s general meeting of shareholders held in July 2004, Messrs. Hartman and Jacobowitz were appointed as joint liquidators and the shareholders approved a fee of $1,000 per month (plus VAT, if applicable), to each of them commencing from the appointment of the liquidation and until distribution of all proceeds of the liquidation to the Company’s shareholders. The amount of compensation due but unpaid to the Company’s liquidators as of December 31, 2004 according to this arrangement is approximately $10,000. This amount was accrued in the financial statement in “accounts payable and accruals” and was paid in May 2007.

In addition, the Company’s shareholders approved that (i) Mr. Jacobowitz will receive an additional bonus as follows: $25,000 (plus VAT, if applicable) if the gross proceeds received by the Company’s shareholders as a result of the liquidation of the net assets of the Company (hereinafter – the “Gross Proceeds”) are above $0.50 per share, $50,000 (plus VAT, if applicable) if the Gross Proceeds are above $1.00 per share and $75,000 (plus VAT, if applicable) if the Gross Proceeds are above $1.30 per share, and (ii) Mr. Hartman will receive an additional bonus of $100,000 (plus VAT, if applicable) if the Gross Proceeds are above $1.30 per share.

Since the Company terminated its voluntary liquidation, the Company’s audit committee and board have approved on June 17, 2007, subject to shareholder approval, that these bonuses will be calculated and paid based on the share price of the Company’s shares in the twenty trading days following the approval of this resolution by the general meeting of the shareholders of the Company (if such approval is given).

The Company has not included any provision for the additional bonus to the liquidators in its financial statements.

F - 20

I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
(An Israeli corporation)
NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 5

–

COMMITMENTS AND CONTINGENT LIABILITIES (continued):

In February 2001, a portion of the Company’s office space located in Ramat Gan, Israel was leased from West End Technology Investments Ltd. (“West End”), a company that is owned by Robi Hartman, the Company’s Chief Executive Officer and Chairman of the Board. As of April 1, 2003, this lease was assumed by Enargis which sublet 35% of the premises to the Company at an annual cost of approximately $12,000. As of December 31, 2004, an amount of $2.5 thousands was postponed until receipts of proceeds from sale of StoreAge or Enargis, and was paid in May 2007, following the termination of the Company voluntary liquidation proceedings. The financial statements include provisions for the aforesaid postponed rent payments. As of November 2005, the sub-lease was transferred back to West End. Following termination of the voluntary liquidation proceedings in April 2007, the Company increased its sublease from 35% to 50% of the premises. The annual cost increased, proportionally, based on the original agreement, with a cap of $3,000 per month (on an average) and will be valid until the later of (1) the merger with Witech or (2) December 31, 2007.

During the year ended December 31, 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 $330,000 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.

In the year ended December 31, 2003 the amount of $330,000 was recorded as income from a lawsuit settlement in the statement of operations.

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 the agreement for the sale of NetWiz, the Company agreed to assume the liabilities in respect of the above 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 $39,000 to the plaintiff, in consideration for the mutual waiver of all claims between the parties. The Company recorded a provision in the amount of $39,000 in respect of this claim in the year ended December 31, 2003.

F - 21

I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
(An Israeli corporation)
NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 6

–

SHAREHOLDERS’ EQUITY:

Share capital

The Company’s shares are traded 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, the right to receive dividends, if and when declared by the board of directors 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. Pursuant to the Plan, the Company reserved for issuance 1,192,929 ordinary shares. The exercise price of the options granted under the plan may not be less than 85% of the fair market value of the Company’s ordinary shares on the date of grant. The options vested primarily up to 3-4 years. No options were exercised during the years ended December 31, 2004, 2003 and 2002. The Plan expired in 2003. The options of the liquidators of the Company expired during the year ended December 31, 2006; all other outstanding options issued under the Plan have either been expired or forfeited the year ended December 31, 2004 or in previous years.

Following is a summary of the status of the Company’s stock option plan and related information:

	Year ended December 31
	2004					2003					2002
	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		781,762		$	4.67		1,008,802		$	7.46		1,066,803		$	7.77

Granted												32,000		$	3.63

Forfeited and cancelled		(375,212	)	$	5.81		(227,040	)	$	17.30		(90,001	)	$	(9.6	8)


Outstanding at the
end of the year		406,550		$	3.63		781,762		$	4.67		1,008,802		$	7.46


Exercisable at the end of the year		406,550		$	3.63		665,662		$	4.86		664,971		$	9.45

F - 22

I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
(An Israeli corporation)
NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 7

–

TAXES:

Measurement of results for tax purposes under the Income Tax (Inflationary Adjustments) Law, 1985 (the “inflationary adjustments law”)

Under the inflationary adjustments law, results for tax purposes are measured in real terms, having regard to the changes in the Israeli consumer price index (“CPI”). The Company is taxed under this law.

Tax rates

The income of the Company is taxed at the statutory rate. In July 2004, an amendment to the Income Tax Ordinance was enacted. One of the provisions of this amendment is that the corporate tax rate is to be gradually reduced from 36%to 30%, in the following manner: the rate for 2004 will be 35%, in 2005 – 34%, in 2006 – 32%, and in 2007 and thereafter – 30%. In August 2005, a further amendment (No. 147) was published, which makes a further revision to the corporate tax rates prescribed by Amendment No. 140. As a result of the aforementioned amendments, the corporate tax rates for 2004 and thereafter are as follows: 2004 – 35%, 2005 – 34%, 2006 – 31%, 2007 – 29%, 2008 – 27%, 2009 – 26% and for 2010 and thereafter – 25%.

Capital gains are taxed at a reduced rate of 25% of the capital gains derived after January 1, 2003 and at the regular corporate tax rate on the gains derived through the aforementioned date.

Deferred income taxes

The deferred income taxes are composed as follows:

	December 31
	2004			2003
	U.S. dollar in thousands


Provided for:
Operating loss carryforward	$	11,768		$	13,589
Capital loss carryforward		10,804			12,603
In respect of investments		1,272			1,526
Others					2

Total		23,844			27,720
Less - valuation allowance		(23,844	)		(27,720	)


		-;-			-;-

The deferred tax assets are computed at the tax rates of 30% as of December 31, 2004 and at the tax rate of 36% as of December 31, 2003 .

F - 23

I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
(An Israeli corporation)
NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 7

–

TAXES (continued):

Taxes included in the statement of operations in year ended December 31, 2004 are in respect of previous years.

Tax loss carryforward

As of December 31, 2004, the Company has carryforward tax losses in the amount of approximately $39 million which may be carried forward and offset against taxable income in the future for an indefinite period (December 31, 2003 – $36 million).

In addition, as of December 31, 2004, the Company has accumulated carryforward capital losses in a total amount of approximately $36 million, which may be offset against future capital gain for tax purposes (December 31, 2003 – $34 million).

Under the inflationary adjustments law (see a. above), carryforward losses are linked to the Israeli CPI.

Tax assessments

Tax assessments for the Company are considered final through the year ended December 31, 2001.

Reconciliation of the theoretical tax expenses to actual tax expenses:

	Year ended December 31
	2004			2003			2002
	U.S. dollar in thousands


Income (loss) before taxes, as reported in the
statements of operations	$	(211	)	$	(114	)	$	(1,120	)

Theoretical income on taxes (tax benefit) at the
statutory rate (35%, 36% and 36% for the years
ended December 31, 2004, 2003 and 2002, respectively)	$	(74	)	$	(41	)	$	(403	)
Valuation allowance		104			122			236
Difference between the basis of measurement of
loss reported for tax purposes and the basis of
measurement of loss for financial reporting
purposes		21			36			35
Special allowance, net of non deductible expenses		(50	)		(117	)		132
Other		(1	)

		-,-			-;-			-,-

F - 24

I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
(An Israeli corporation)
NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 8

–

SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION:

Balance sheets:

	December 31
	2004		2003
	U.S. dollar in thousands


a. Accounts receivables:
Receivables on account of a lawsuit
settlement (see note 5e)			$	110
Prepaid expenses				23
Related parties	$	10		5
Other				2

	$	10	$	140


b. Accounts payable and accruals:
Payroll and related expenses	$	1	$	9
Accrued expenses		186		148
Related parties		1
Provision for a litigation (see note 5f)				39
Other		1		12

	$	189	$	208

Statement of operations:

	Year ended December 31
	2004			2003			2002
	U.S. dollar in thousands


c. General and administrative expenses:
Liquidators fees	$	10
Directors fees		71		$	118		$	201
Directors insurance					89			90
Payroll and related expenses		32			37			31
Rent and office maintenance		19			18			29
Professional fees		42			153			142
Capital loss from write-off of fixed assets		9			12
Other		17			14			84

	$	200		$	441		$	577


d. Financial income (expenses) - net:
Interest income	$	3		$	3
Interest expenses					(4	)	$	(8	)
Foreign currency translation differences					(2	)		8
Other		(7	)

	$	(4	)	$	(3	)		-,-

F - 25

I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
(An Israeli corporation)
NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 8

–

SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):

	Year ended December 31
	2004		2003		2002
	U.S. dollar in thousands


e. Non-recurring income - net:

Reversal of sales taxes provision					$	10
Reversal of a lawsuit provision						216
Loan write-off						(44	)
Restructuring charges (see note 1a(2))						(60	)

		-,-		-,-	$	122

NOTE 9

–

RELATED PARTIES – TRANSACTIONS AND BALANCES:

Transactions with related parties:

	Year ended December 31
	2004		2003		2002
	U.S. dollar in thousands


Rent and office maintenance (1)	$	19	$	18	$	35

Administrative expenses (2)	$	16	$	11		-,-

Reimbursement of expenses by StoreAge		-,-		-,-	$	38

Sales to StoreAge, net		-,-		-,-	$	115

(1)

See note 5d.

(2)

To Storage, in respect of services received until April 2005.

Related party balances:

	December 31
	2004		2003
	U.S. dollar in thousands


Accounts receivable	$	10	$	5

Accounts payable	$	1		-,-

F - 26

I.I.S. INTELLIGENT INFORMATION SYSTEMS LIMITED
(An Israeli corporation)
NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 9

–

RELATED PARTIES – TRANSACTIONS AND BALANCES (continued):

Under the Company’s 1993 Stock Option Plan (see note 6b), the Company granted the CEO of the Company, on November 30, 2000, 356,550 options as follows:

55,600 of the options had no vesting terms, the remaining options vested annually in four equal batches, from March 22, 2001 until March 21, 2004. All options expired on November 30, 2006.

NOTE 10

–

GEOGRAPHIC INFORMATION

The Company operates in one reportable segment 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, 2004, 2003 and 2002 and long-lived assets as of December 31, 2004 and 2003:

	Year ended December 31
	2004		2003		2002
	U.S. dollar in thousands


Sales to unassociated customers:
United States					$	54
Israel						8

		-,-		-,-	$	62

	December 31
	2004		2003
	U.S. dollar in thousands


Long-lived assets - Israel		-,-	$	9

F - 27

FORM 20 F

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

For the fiscal year ended December 31, 2004

None

Ordinary Shares, NIS 0.003 par value per share

None

TABLE OF CONTENTS

PART I

A. Selected Financial Data.

B. Capitalization and Indebtedness.

C. Reasons for the Offer and Use of Proceeds.

D. Risk Factors.

Risk Factors Relating to Our Operations in Israel

A. Entry into Voluntary Liquidation

B. History and Development of the Company.

C. Business Overview.

Products and Systems

D. Organizational Structure.

E. Property, Plants and Equipment.

Forward-Looking Statements

Critical Accounting Policies

A. Operating Results.

General

Results of Operations

Impact of Inflation and Exchange Rates

Effective Corporate Tax Rate

Quarterly Results

Governmental, Economic, Fiscal, Monetary or Political Factors

Political Conditions

Economic Conditions

B. Liquidity and Capital Resources.

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

D. Trend Information.

E. Off-Balance Sheet Arrangements.

F. Tabular Disclosure of Contractual Obligations

A. Directors and Senior Management.

External and Independent Directors

Audit Committee

Internal Auditor

C. Employees.

D. Share Ownership.

Stock Option Plans

A. Major Shareholders.

B. Related Party Transactions.

C. Interests of Experts and Counsel.

A. Statements and Other Financial Information.

Legal Proceedings

Dividends

B. Significant Changes.

A. Share Capital.

B. Memorandum and Articles of Association.

Objects and Purposes in the Company’s Articles of Association

Provisions Regarding Directors

Dividends

Terms of Directors

Votes of Shareholders

Further Rights and Preferences of the Ordinary Shares

Modification of Class Rights

General Meetings

Quorum at General Meetings

Restrictions on Shareholders Rights to Own Securities

Potential Issues that Could Delay a Merger

Requirement of Disclosure of Shareholder Ownership

Approval of Related Party Transactions Under Israeli Law

Indemnification of Directors and Officers

Anti-Takeover Provisions; Mergers and Acquisitions under Israeli Law

Changes in Capital

C. Material Contracts.

D. Exchange Controls.

E. Taxation.

General Corporate Tax Structure

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

Taxation Under Inflationary Conditions

Capital Gains Tax

Dividends

United States Federal Income Tax Consequences

Taxation of Dividends

Dispositions of Ordinary Shares

Passive Foreign Investment Companies

Backup Withholding and Information Reporting

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