ITEM 4: INFORMATION ON THE COMPANY

HISTORY AND DEVELOPMENT OF THE COMPANY

Gilat Satellite Networks Ltd. is a leading provider of products and services for satellite-based communications networks. In its most recent available report published in 2001, Comsys, a specialized consulting company that analyzes the satellite communications industry, reported that Gilat is the second-largest manufacturer of very small aperture terminals, referred to in the network communications industry as VSATs. Gilat was incorporated in Israel in 1987 and is subject to the laws of the State of Israel. Gilat's corporate headquarters, executive offices and research and development, engineering and manufacturing facilities are located at Gilat House, 21 Yegia Kapayim Street, Kiryat Arye, Petah Tikva 49130, Israel. The telephone number is (972) 3-925-2000.

The name "Gilat(TM)" and the names "TwoWay(TM)," "OneWay(TM)," "FaraWay(TM)," "DialAw@y IPTM," "SkySurfer(TM)," "SkyWay(TM)," "Skydata(R)," "Clearlink(TM)" and "Skystar Advantage(R)" appearing in this annual report on Form 20-F are trademarks of Gilat and its subsidiaries. GSAT(R) is a registered trademark of GTECH Corporation ("GTECH"). StarBand(TM) is a trademark belonging to StarBand , ISAT(R) is a trademark which Gilat sold to and is now owned by L-3 Communications Inc. See Item 4: "Information on the Company -- Products and Services." Other trademarks appearing in this annual report on Form 20-F are owned by their respective holders.

Gilat shipped its initial product, a first generation OneWay VSAT, in 1989. Since that time, we have devoted significant resources to developing and enhancing our VSAT applications and establishing strategic alliances primarily with major telecommunications companies and equipment suppliers. We have also broadened our marketing strategy by providing a full range of VSAT services and by emphasizing sales to customers directly and through new distribution channels.

In 1991, we began marketing our second generation OneWay VSAT. In 1992, we began marketing our TwoWay VSAT with Spacenet as part of Spacenet's Skystar Advantage VSAT service offering and we began marketing our TwoWay VSATs to GTECH as part of GTECH's GSAT lottery networks. Over the years, we experienced significant growth in orders, sales and earnings including from our OneWay and Skystar Advantage products. By an agreement in 1992, COMSAT RSI, Inc. became our joint venture partner to develop, manufacture and market two-way rural telephone VSAT products. We began marketing the FaraWay VSAT in 1994. We began marketing the DialAw@y IP VSAT, another rural telephony product outside of the scope of that joint venture, at the end of 1996. Additionally, we began marketing the SkySurfer VSAT in 1997 and the SkyBlaster VSAT in 1999. The Skystar Advantage is our largest-selling product, accounting for approximately 58%, 50% and 63% of our sales revenue during 2000, 2001 and 2002 respectively.

We initiated a rural telephony project in 1997 through a wholly owned subsidiary, Gilat-to-Home Latin America (Netherlands Antilles) N.V., formerly known as Global Village Telecom N.V. ("GTH LA Antilles"). In April 1998, we reduced our holdings in GTH LA Antilles to a minority holding through a $40 million private placement with international investors. In April 2000, we acquired substantially all of this company, as more fully described under "GTH LA Antilles" below. Through GTH LA Antilles, we were able to establish rural telephony projects in countries such as Chile, Peru and Colombia.

In 1999, we began marketing our SkyBlaster VSAT product. The SkyBlaster product is a two-way IP-based product with which broadband Internet services via satellite are provided. One of the first SkyBlaster products developed was the 360 model, designed for consumers and home offices and small business users. In 2001, we completed development of the Skystar 360E, a two-way satellite-based communication geared toward the enterprise market, that enables networking between a central hub and thousands of locations. The Skystar 360E was launched in 2002, and approximately 10,000 have shipped since.

In October 2002, to permit completion of a detailed restructuring arrangement and its submission to holders of the our 4.25% Convertible Subordinated Notes due 2005 (the "old notes"), and certain other creditors, we filed with the Israeli Court a petition under Section 350 of the Israeli Companies Law - 1999 for a stay of proceedings only on actions by holders of the old notes and the bank lenders. In March 2003, after negotiating with both the holders of the old notes and our major creditors, we received the approval of the Israeli courts, and completed a plan of arrangement (the "Arrangement") with our bank lenders, holders of the old notes and certain other creditors. Pursuant to the Arrangement, our old notes were cancelled and the holders of the old notes were issued a combination of 4.00% Convertible Notes due 2012, referred to herein as Notes, and ordinary shares. Additional Notes and ordinary shares were also issued in exchange for a portion of our bank debt and debt to another financing creditor.

As of March 31, 2003, 259,757,196 of our ordinary shares were outstanding. The Arrangement reduced our principal debt by approximately US$300 million, secured new agreements with our banking creditors, and significantly reduced overall financing costs.

As part of the Arrangement, we entered into a new agreement with SES Americom, our major supplier of satellite transponder capacity. Under the agreement, SES Americom agreed to terminate its transponder capacity agreements with Spacenet that relate to StarBand (which is partially held by Spacenet) and to enter into a new transponder capacity agreement directly with StarBand. SES Americom also agreed to allow Spacenet to defer an outstanding debt of $3.5 million to 2003, and to defer payment of certain transponder capacity charges due in 2003 and 2004, with payment of those deferred charges to commence in 2005. The agreement reduced the aggregate amount payable to SES Americom in 2003, from $26.9 million to $16.5 million (including the $3.5 million which was deferred from 2002 to 2003). As part of this agreement, we issued SES Americom a number of ordinary shares equal to approximately 5.5% of our ordinary shares, that, together with our ordinary shares already held by an affiliate of SES Americom, constitute approximately 7.2% of our outstanding ordinary shares as of March 31, 2003.

On March 19, 2003, we distributed a proxy statement to our shareholders of record as of March 17, 2003, in connection with an annual general meeting of shareholders scheduled for April 15, 2003. At the annual general meeting, our shareholders will be asked to elect nine directors to our board of directors (including two external directors), receive and consider our financial statements for the year ended December 31, 2001, and ratify the appointment of our independent public accountants for 2002 and reelect our independent public accountants until the next annual general meeting of shareholders. In accordance with the Arrangement, our shareholders will also be asked to approve (i) an increase of our authorized share capital, (ii) a 1-for-20 reverse stock split to be effective as of April 16, 2003, and (iii) an amendment to our Articles of Association providing for new terms for the election and removal of directors. If approved, the reverse stock split that will be effective as of April 16, 2003, will reduce the number of the outstanding shares of the Company to approximately 12,987,860 shares, based on the amount of ordinary shares outstanding as of March 31, 2003.

SPACENET INC.

On December 31, 1998, we completed the acquisition of Spacenet Inc., a company engaged in providing VSAT-based network services, from SES Americom (formerly known as GE Americom) and certain affiliates. Prior

to the acquisition, Spacenet was our single largest customer. Spacenet purchased our VSAT products in order to incorporate them into Spacenet's VSAT-based network service offerings.

As part of the Spacenet acquisition, we entered into several significant agreements with SES Americom. See Item 7: "Major Shareholders and Related Party Transactions -- Related Party Agreements; Spacenet Merger-Related Agreements." The acquisition of Spacenet has enabled Gilat to expand from primarily manufacturing and selling VSAT equipment to becoming a provider of complete end-to-end telecommunications and data networking solutions based on VSAT satellite earth stations. Currently, Spacenet provides two-way, satellite-based, broadband networking solutions for a wide range of organizations throughout North America. These solutions serve as a "one-stop shop" for businesses with product sales and services that include provision of all equipment, bandwidth, implementation and ongoing network and field support on a full outsource basis. These network solutions are traditionally for large enterprises that require hundreds or sometimes thousands of VSATs with high-speed Internet access and communication between the VSATs. Most service contracts through Spacenet are for a five year period and enterprises pay on a per site, per month basis in addition to upfront installation and hardware and software fees. Customers of Spacenet include the United States Postal Service, GTECH, and Dollar General. In 2002, Spacenet expanded its market to include a satellite network solution product for small to mid-sized enterprises. This business offers standard services, hardware and software for enterprises that want a network comprising of up to 50 VSATs. In the year 2001, Spacenet's revenues accounted for approximately one-third of our total revenues, and in 2002, Spacenet's revenues accounted for approximately one-half of our total revenues.

STARBAND

In March 2000, we established StarBand, formerly known as Gilat-to-Home, Inc., with MSN, EchoStar and ING, to provide broadband Internet access via satellite to residential, small office/home office ("Soho") and small business customers in North America.

StarBand currently has approximately 40,000 subscribing customers. These customers receive full Internet services and connectivity from StarBand, including our SkyBlaster 360. We have entered into a master supply and services agreement with StarBand. In the years 2001 and 2002, the revenues from sales to StarBand accounted for approximately 11.5% and 1.5% of our total revenues, respectively.

On May 31, 2002, StarBand filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Since that time, we have provided to StarBand approximately $7 million of "debtor in possession" financing, the majority of which has been in the form of transponder capacity, and additional financing of approximately $18 million. There is no guarantee that StarBand will emerge from bankruptcy, and therefore in 2002, we recognized equity losses in the amount of $25 million, representing the total financing provided to StarBand. See below: "Strategic Alliances and Joint Ventures; StarBand."

GTH LA ANTILLES

In April 2000, we completed a share exchange transaction in which we acquired all the outstanding shares of certain other investors in GTH LA Antilles, in exchange for the transfer to a new company organized by these other investors of GTH LA Antilles' entire right and interest in two Brazilian subsidiaries, and a cash payment of $5.3 million. The Brazilian subsidiaries were formed to provide telephone and other telecommunications services in South Central Brazil.

As a result of the transaction, we own substantially all of the outstanding shares of GTH LA Antilles and we renamed the company "Gilat-To-Home Latin America (Antilles) N.V." from its previous name Global Village Telecom (Antilles) N.V. See below: "Strategic Alliances and Joint Ventures; GTH LA Antilles."

GTH LA Antilles' business focused on the provision in Latin America of interactive data communications and corporate communications products and services and satellite-based rural telephony. These subsidiaries, in Colombia, Peru, Brazil, Costa Rica, Mexico and Argentina offer various VSAT network services, primarily for telephony but more recently also for high-speed Internet access. In many instances, we have won government bids which have enabled us to install telephone services (both public and private) in rural areas. Some of these subsidiaries have been sold to StarBand Latin America as described below. See "Item 4: rStar".

RSTAR CORPORATION

In January 2001, following a tender offer, we became the owners of 51% of the outstanding shares of rStar Corporation (formerly named ZapMe! Corporation) ("rStar"), a corporation listed on the Nasdaq SmallCap market, at a cost of approximately $51 million. At that time, rStar changed the focus of its business from building an advertiser supported network for the educational markets to implementing and managing industry-specific private networks for businesses to communicate with their vendors and customers via bi-directional satellite-delivered Internet connections.

In August 2002, we completed a transaction with rStar pursuant to which we became the owners of approximately 85% of rStar's stock. As part of the transaction, we sold to rStar a wholly owned subsidiary, StarBand Latin America (Holland) B.V. StarBand Latin America was created to provide, through local subsidiaries, two-way always on, high-speed Internet access and telephony to residential and Soho customers in Latin America. This business acquired by rStar currently operates satellite-based rural telephony networks in Colombia, Peru and other Latin American countries. See below "Strategic Alliances and Joint Ventures rStar".

SATLYNX S.A.

In April 2002, we completed agreements to form Satlynx S.A., a company that provides two-way satellite broadband communications services to enterprises, consumers and Soho users throughout Europe. Satlynx was formed with SES Global, a leading satellite provider and an affiliate of SES Americom. As part of the agreement, we contributed to Satlynx one of our subsidiaries in Holland and sold to Satlynx our existing European operations which included enterprise customers in France, Italy, Germany, England and Czechoslovakia. We own 50% of the shares of Satlynx, but we do not control Satlynx. See "Item 4:
Strategic Alliances and Joint Ventures - Satlynx S.A.".

DETERMINISTIC NETWORKS INC.

In July 2000, we acquired all of the shares of Deterministic Networks, Inc. ("Deterministic"), a privately held company based in California. Deterministic is a supplier of policy-based networking products and toolkits to several major technology companies, providing quality of service, network management and Internet security capabilities that enhance the products and services of its customers. In exchange for Deterministic's stock, the shareholders of Deterministic received 218,422 ordinary shares of Gilat valued at approximately $7.8 million. A total of $7.2 million of this price was attributed to goodwill which was amortized at an annual rate of 20% up to December 2001, with the balance impaired in 2002 and recorded as a cumulative effect of change in accounting principle in the first quarter of 2002. Currently, Deterministic has approximately ten employees and continues to develop software-networking products for us and for other major technology companies.

FINANCING TRANSACTIONS

In February 2000, we completed a private offering of $350 million of convertible subordinated notes due 2005. The notes were convertible into ordinary shares at a conversion price of $186.18 per share. In March 2003, pursuant to the Arrangement, we cancelled these notes and issued to the holders of these notes an aggregate of (i) 202,083,908 ordinary shares; and (ii) $83,254,000 in principal amount of 4.00% convertible notes due 2012. See Item 5:
"Operating and Financial Review and Prospects - Commitments and Contingencies."

In May 2000, we exercised our right to redeem our 6 1/2% convertible subordinated notes due 2004 that were issued on May 14, 1997 for a total amount of $75 million. These notes were redeemable in full at 102% of the principal amount plus accrued and unpaid interest, setting the redemption price per $1,000 notes at $1,020.72. All of the holders of our 6 1/2% convertible subordinated notes due in 2004 opted to convert their notes into Gilat's ordinary shares prior to the redemption date and we consequently issued 1,785,690 ordinary shares to such holders.

In December 2000, we entered into a facility agreement with Bank Hapoalim, under which we borrowed $108 million to finance our general corporate activities and the increase in our working capital. The loan bore interest at LIBOR plus 0.8% per annum and the principal was repayable in six semi-annual payments commencing June 2002. In June 2002, we paid part of the initial payment due of $6 million in principal.

In March 2003, as part of the Arrangement, we amended our agreement with Bank Hapoalim. Of the $102 million in principal amount due from us to Bank Hapoalim, (i) $25.5 million was converted into 18,488,590 ordinary shares, (ii) $5.1 million was converted into Notes of the same principal amount and (iii) the remaining debt amount of $71.4 million remains as a loan on revised terms. The revised terms include equal semiannual installments of principal of $4.463 million beginning on July 2, 2005, with a last installment of $8.925 million on July 2, 2012. The loan bears interest at the six-month LIBOR rate plus 2.5% and is payable semiannually together with the installments of principal.

In September 2001, Bank Leumi lent us $30 million to be repaid in a single installment on April 5, 2003. This loan bore interest at LIBOR plus 2.5% per annum. The loan is secured by a lien on our buildings in Petah Tikvah, Israel. In March 2003, as part of the Arrangement, the terms of the loan made by Bank Leumi were revised. The revised terms of the restructured loan include principal payments in the amount of $1 million annually during each of 2003 and 2004, and principal payments of $4 million annually during each of the years 2005 through 2011. The loan bears interest at the six-month LIBOR rate plus 2.5%. In addition, Bank Leumi agreed to maintain its line of credit utilized for performance guarantees for our benefit and for our direct and indirect subsidiaries in the existing aggregate amount of $15 million for at least one year, subject to the limitation that continued availability of the line of credit may be affected by the overall collateral made available by us in support of credit used by us in the future for the issuance of guarantees. The loan remains secured by a lien on our buildings in Petah Tikvah, Israel.

In March 2003, as part of the Arrangement, Israel Discount Bank agreed to maintain its performance guarantees for our benefit and our subsidiaries in the existing amount of $13.3 million for at least one year.

For more details on the Arrangement, see "Item 5: Operating and Financial Review and Prospects -- Commitments and Contingencies."

CAPITAL EXPENDITURES AND DIVESTITURES

In June 2000, we purchased the land and building facilities that are Spacenet's headquarters and operations center. The purchase price was approximately $24.3 million, which was paid in cash. In order to increase our available cash flow, we subsequently sold these premises for approximately $31.5 million (net of related costs of approximately $1.5 million) and Spacenet currently leases this space pursuant to a lease for 15 years, at an initial annual rent of approximately $3.5 million.

In 2000, 2001 and 2002, Gilat's property and equipment purchases amounted to approximately $147,907,000, $59,235,000 and $9,739,000, respectively. These capital expenditures were financed primarily from Gilat's February 2000 convertible subordinate notes offering described above.

In addition, during 2000 and 2001, we invested approximately $13 million in the purchase and development of a facility for a new operations center in Backnang, Germany. In June 2001, we entered into a mortgage and loan agreement with a German bank, secured by our Backnang facilities. The mortgage was for an original amount of approximately $5.3 million, of which (i) approximately $0.9 million bears interest at 5.86% and is repayable over 5 years commencing July 2001 and (ii) approximately $4.4 million bears interest at 6.3% and is repayable quarterly over 20 years commencing July 2006. As of December 31, 2002, the amount of the mortgage is approximately $6.1 million. Under the agreement with SES Global, this facility has been leased to Satlynx. See below:
"Strategic Alliances and Joint Ventures - SES Global".

BUSINESS OVERVIEW

GENERAL

Gilat is a leading provider of products and services for satellite-based communications networks. We design, develop, manufacture, market and service products that enable complete end-to-end telecommunications and data networking solutions, as well as broadband Internet solutions, based on satellite earth stations, a related central station known as a hub, hardware equipment and software. The satellite earth stations are known in this industry as very small aperture terminals or VSATs. These small units, which attach to communication equipment, such as personal computers, telephones, etc., enable the transmission of data, voice and images to and from certain satellites. The services we provide include access to and communication with satellites ("satellite transponder capacity"),

installation of network equipment, on-line network monitoring and network maintenance and repair services. We distribute our products and services worldwide through our own direct sales force, service providers and agents and, in certain circumstances, joint ventures, alliances and affiliated companies. According to the 2001 Comsys Report, which is the most recent available Comsys report, we were the second largest manufacturer of VSATs and had a 43% share of the VSAT market based upon the number of VSATs shipped in the year 2000.

The networks we establish are primarily used for:

o Internet-based networking applications such as networks within corporations (known as corporate intranets), corporate training and other corporate applications which enable the transmission of audio and video by high-speed Internet connections (known as broadband), as well as consumer broadband Internet uses;

o on-line data delivery and transaction-oriented applications including point-of-sale (for example, credit and debit card authorization), inventory control and real time stock exchange trading; and

o telephone service in areas that are underserved by the existing telecommunications services or in remote locations without service.

Among our largest customers are the United States Postal Service, GTECH, and Dollar General in the United States, Fondo de Inversion en Telecomunicaciones del Peru (Fitel) in Peru, and the Ministries of Communication in Brazil and Colombia.

Satellite-based communications networks such as those Gilat has developed offer several advantages over ground-based communication facilities. Among these advantages are the following:

o ubiquitous reach, providing equal access to users in urban and remote areas under a single tier network;
o fixed transmission costs, insensitive to distance or the number of receiving stations;
o a persistent "always on" connection to the Internet without the need to dial up to an internet service provider;
o cost savings over competing technologies such as ground telephone lines and digital subscriber lines (commonly known as "DSLs") in remote areas and suburbs;
o independence from telecommunication companies and other network providers;
o less terrestrial infrastructure thus making satellite-based technology less susceptible to local disasters such as fires and earthquakes that adversely affect ground-based communication;
o consistent and rapid response time in comparison to dial-up lines;
o Internet acceleration technologies, enhancing user experience and improving satellite communication effectiveness;
o rapid installment of networks and flexibility in their configuration, integration and location; and
o a versatile platform, which allows for the provision of multiple applications and services.

VSAT INDUSTRY BACKGROUND

The emergence of the Very Small Aperture Terminal in the 1970s marked the beginning of a new era in satellite communication. A VSAT network consists of:

o several dozen to several thousand VSAT remote sites with small antennas;

o a large central earth station called a hub, which includes a large antenna and enables the connection of all the VSATs in the network; and
o the capability to communicate with a specified satellite.

A VSAT includes an indoor unit and an outdoor unit (see figure below). The indoor unit usually fits on a desktop (much like a modem) and contains the technology that enables communication between the user's equipment and the satellite. The outdoor unit includes a small antenna, usually two to six feet in diameter, that can be mounted on a user's roof, ground or wall and electronic equipment that transmits and receives signals to and from a satellite transponder. A transponder is the technical term for the space on a satellite designated to communicate with a specific user's equipment.

[PICTURE]
VSAT on-site equipment

The control station or hub, which enables the connection of all VSATs into a VSAT network, consists of a large dish antenna (4.5 to 11 meters) and radio frequency electronics equipment to allow signals to be transmitted between the hub and the satellite transponder. A hub also includes electronic equipment to provide for satellite communications, protocol support and network management functions. Protocol is a technical term, which refers to the standards and methods by which computers communicate with one another.

Satellite transponder capacity is available on existing satellites positioned in geostationary orbit (at 35,800 km above the equator). Once in orbit, a satellite beam can cover a geographic area the size of the continental United States or Western Europe. This coverage area is known as the satellite's footprint. The satellite receives information from a VSAT, amplifies it and transmits it back to earth on a different frequency. A single satellite transponder has a capacity of approximately 100 million bits/second ("Mbps"). This means that if the transponder is accessed for only 90 seconds per day, more than one billion bytes of data, the equivalent of 865,000 double-spaced pages, would be transmitted.

The current generation of high power satellites is known as Ku-band satellites, because they use the Ku-band frequencies. This type of frequency band together with the sophisticated VSAT earth stations is particularly well suited to provide high-speed business communications services as well as broadband web-based services. The use of the Ku-band frequencies (as opposed to the C-band used by older generations of satellites) offers reduced interference with ground communications. This enables satellites to use the higher broadcasting power necessary to support VSAT earth stations and makes it cost-effective to transmit to or among numerous locations. With increasing satellite power and the latest generation of VSAT software, VSAT earth stations are becoming smaller and less

expensive, reducing overall network costs. Our technology is compatible with both Ku-band and C-band satellites. In addition, special extended C-band and extended Ku-band satellites are also supported by our technology, where needed.

Before the emergence of VSATs, commercial communication via satellite was very costly because it required an expensive ground terminal, dedicated staff specialists and a very large dish antenna. Satellite-based communications solutions were therefore limited to only those large companies that could afford them. In contrast, VSATs are significantly less expensive than other satellite solutions partly because they do not require end-users to dedicate staff specialists or make a sizable infrastructure investment.

VSAT networks also offer several advantages compared to ground-based communications networks:

o high quality and dedicated transmission availability;
o the capability of transmitting extremely large data flows;
o fixed transmission costs, insensitive to distance or the number of receiving stations;
o rapid and cost effective installation in geographically isolated regions like mountainous mining areas and developing countries; and
o direct access to the Internet.

MARKET OPPORTUNITY

The market for communications network products and services experienced growth during the years 1996 through 2000 and a slowdown in 2001 and 2002, which was largely caused by the recession in the global economy and a reduction of telecommunications business in particular. We believe that when the economy improves, the market for communications network products will continue to grow. Some of the key factors that we believe will foster such growth in a healthy economy include:

o growing demand for communications capacity driven by the increase in bandwidth-intensive applications, including the Internet;
o continuous technological advances which are broadening applications for and decreasing the cost of both satellite and ground-based networks;
o global deregulation and privatization of government-owned telecommunications monopolies, which allow for the growth of new methods of communication.
o government investments in the development of communications technologies for populations outside of the city centers, thereby leading to increased telephony and Internet access for rural businesses, communities and education facilities.

Development of the telecommunications market in the past ten years has led to the growth of a range of alternative technologies such as switched digital networks, which are referred to as ISDN service, DSL, cable modems, frame relay wireless technologies, cellular data services, as well as VSAT-based systems. All of these technologies enable high-speed access to the Internet in various forms that allows for the transfer of data at various speeds as well as telephony with advanced services. Despite a slowdown in the telecommunications market in the past year, the growth in the use of VSATs has been strong and consistent. According to industry sources, the installed worldwide VSAT base grew from 8,000 terminals in 1986 to over 600,000 terminals in 2001.

We provide VSAT communication solutions to each of the following three expanding markets: Enterprise, Telephony and Consumer Broadband and Internet access.

VSAT-BASED PRODUCTS FOR ENTERPRISES

In the past decade, there has been significant growth in services, which require interactive data networks such as automatic teller machines, which are referred to as ATMs, and credit and debit card machines that enable

businesses to receive "instant" approval of consumer purchases. This growth has led to increased demand for satellite-based networks. VSAT and other satellite technology are particularly well suited to those data networks which need to (i) reach many locations over vast distances simultaneously, (ii) solve a "last mile" or congestion problem, allowing high bandwidth access in areas currently limited to slow connections like copper wire, (iii) transmit to remote locations and to emerging markets where the terrestrial telecommunications infrastructure is not well developed, and (iv) rapidly provide services across a large geographic area served by multiple terrestrial providers. Due to the above advantages, corporate users are increasingly realizing the benefits of VSAT networks. Additional uses of the VSAT-based data networks for enterprises include lottery card transactions (whereby chosen lottery numbers of consumers are transmitted via VSATs located in various stores and stations to a control hub), retailer and manufacturer inventory control and utilities' monitoring and control systems for power lines and pipe lines.

VSAT-BASED TELEPHONY PRODUCTS

In a large number of remote, rural and urban areas, primarily in developing countries, there is limited or no telephone service due to inadequate ground telecommunications infrastructure. In these areas, VSAT networks are able to utilize existing satellites to rapidly provide high quality cost-effective telecommunications solutions. In contrast to ground-based networks, VSAT networks are simple to reconfigure or expand, relatively immune to difficulties of topography and can be located almost anywhere. Additionally, VSATs can be installed and connected to a network in a matter of hours and seldom require maintenance.

As a result of the above advantages, the market for VSAT-based fixed telephony products is growing. This market consists of public telephone operators that need to fulfill service obligations worldwide, large companies that require private networks to provide inter-office communications between branch offices and corporate headquarters, and service providers targeting rural and residential areas in developing countries that do not have a ground-based telecommunications infrastructure.

VSAT-BASED BROADBAND AND INTERNET PRODUCTS FOR CONSUMERS

The term broadband services refers to networks that provide high-capacity, high-speed transmission of data. Broadband networks allow for multimedia transmissions and can provide high-speed "always on" Internet connectivity. A multimedia transmission (also known as "multimedia streaming") is a distribution process that allows simultaneous broadcasting and playback of video and audio content. The terrestrial Internet infrastructure was not designed to support the traffic load created by broadcasting full motion video or high-fidelity audio. Currently, there are three terrestrial means of providing broadband services to consumers: cable, DSL and fixed wireless. The VSAT-based consumer broadband service that we offer is differentiated from terrestrial competitors by the following characteristics:

o rapid availability - cable and DSL providers must install the appropriate infrastructure at a high investment and with an extensive time to market delay. In contrast, the satellite solution relies upon the use of hubs that can be installed within a matter of days and can serve thousands of sites and allows for quick installation of user sites.

o efficient distribution - the consumer broadband service has the ability to broadcast content to subscribers without encountering any last-mile bottlenecks of terrestrial networks. Content, such as stock quotes and live multimedia transmissions can be broadcast to a network of users while the always-on return path enables unicast transactions desired by any user. A unicast transaction, or unicasting, involves the transmission of information to a single location. Stock trading over the Internet, for instance, is considered a unicast transaction.

                          PRODUCTS BY VSAT MARKET TYPE

      TYPE                                PRODUCTS/APPLICATION
-----------------   ----------------------------------------------------------------------------------------
Data Network        Skystar Advantage -   ISAT*                   Skystar 360E            SkyWay RF **
Applications for    Interactive Data      - Frame Relay                                   Transceivers
Enterprises         Multiple Protocols
                                                                  - Two-way Internet      - Data Broadcast
                                                                  Access for Small
                                                                  Offices and Home
                                                                  Offices

Telephony           FaraWay               DialAw@y IP
Applications        - Satellite           - Rural Telephony
                    Telephony

Consumer                                  SkyBlaster 360
Applications                              - Two-way Internet
                                          Access for Consumers

* Gilat no longer offers this product application. ** This product application is no longer marketed by Gilat but is available upon request.

In 2001, we sold our ISAT product to L-3 Communications, Inc. as part of our strategy to eliminate our secondary product applications and to enable us to focus on our core activities of interactive data, networking between VSATs and providing high-speed Internet access connections and public telephony access.

DATA DELIVERY VSATS FOR ENTERPRISES

SKYSTAR ADVANTAGE is a private VSAT network designed for data, multimedia and voice applications, providing highly reliable communication between a central hub and almost any number - tens or thousands - of geographically dispersed sites. Skystar Advantage integrates the features of several different applications into a single platform. The same network can be used for interactive data and voice, as well as for multicasting multimedia over an Internet service provider. Its modular 3-slot plug-in card enables a service operator to customize for each remote site according to their specific and changing needs.

Gilat's Skystar Advantage is already implemented in numerous markets, such as: Internet access, banking, multimedia, Supervisory Control and Data Acquisition ("SCADA" - a technical term for computer systems that collect and summarize data from up to thousands of computers into reports for operators and management), retail and gas stations. The applications currently served by the Skystar Advantage include credit and debit card authorization for retail sales, point-of-sale information and ATM networks, on-line recording and validation of lottery tickets, prescription verification, inventory control and review of customers profiles, inventory control and delivery scheduling at the manufacturing level, supervisory control and data acquisition networks for oil and gas pipelines, on-line remote stock exchange trading for brokers, distance learning and Internet access. Additional voice channel add-ons are available, as are video and audio broadcasting applications.

[PICTURE]
SKYSTAR ADVANTAGE NETWORK ARCHITECTURE

ARCHITECTURE. As illustrated above, our Skystar Advantage VSAT product consists of remote terminals, hub equipment and related software. Our remote terminal consists of a small outdoor antenna (typically 0.55 to 1.2 meters in diameter for the Ku-band frequency and 1.8 to 2.4 meters in diameter for the C-band frequency), an outdoor electronics unit and an indoor electronics unit. The outdoor unit receives signals from a satellite transponder using a Low Noise Block frequency down-converter that converts between the higher frequency a satellite uses and the lower frequency used by the antenna and the indoor unit. The outdoor unit then transmits signals to the satellite transponder using our proprietary frequency up-converter that converts the low frequency into the high frequency used by the satellite and power amplifier. The indoor unit incorporates a satellite modem utilizing digital signal processing technology and a powerful central processing unit. The central processing unit controls communications through the satellite (including the satellite access scheme) and provides the platform for interface to the end-user's remote terminal equipment. The small antenna typically is supplied by a third-party vendor or purchased directly by our customer. We design and manufacture the indoor unit, design and integrate the outdoor unit and supply that part of the software that, among other things, controls the satellite access scheme and the end-user interfaces.

The Skystar Advantage's modular configuration includes intrinsic flexibility with three indoor unit slots for plug-in cards. This architecture enables field upgradability by the addition of plug-and-play cards, which are able to support a variety of interfaces and applications such as LAN (local area networks), Universal Serial Bus port (USB port), a standard port used in PCs to connect a computer with external applications such as modems, VSATs and digital cameras, serial ports that are used as standard interface to many devices, such as ATM's and lottery machines, and video and voice cards.

The hub for the network incorporating our Skystar Advantage VSAT products consists of a radio frequency terminal and baseband equipment. The radio frequency terminal incorporates a large dish antenna (typically 4.5 to 11 meters) and radio frequency electronics equipment (up and down frequency converters, low noise amplifiers and high power amplifiers). The baseband equipment is comprised of the hub satellite processor, hub protocol processor and network management system ("NMS"). The hub satellite processor hardware provides the communication connectivity to the remote terminals and the hub protocol processor provides the interface between the hub satellite processor and the customer host computer running end-user applications. The NMS monitors and controls all the

remote terminals and the hub equipment. We design and manufacture the hub satellite processor, hub protocol processor and NMS software and hardware. Third-party vendors typically provide the radio frequency terminal.

Our Skystar Advantage VSAT product utilizes a patented technology that enables us to use low-cost outdoor unit hardware and allows the VSAT network to handle momentary peak traffic loads without any significant degradation of response time.

FEATURES. The Skystar Advantage VSAT now offers a feature enabling Internet connectivity and additional voice channel capability, enabling voice communication between the hub site and a remote location. A VSAT network incorporating our Skystar Advantage VSAT product can offer features including:
low-cost terminal equipment; rapid response time; high network availability; small antenna size which allows for easy installation and maintenance; very low transmission error rate; high hardware reliability; a variety of customer interfaces such as local area networks ("LAN") (e.g., Token-Ring and Ethernet); support for commonly used data communications protocols, including and, if required, simultaneously X.25, SDLC, TCP/IP IP routing, MPEG1, MPEG2 and video; easy integration of additional value-added services such as data, audio and video broadcasting, and modular design that enables easy and staged network expansion.

In 2002 our development efforts for the Skystar Advantage VSAT continued toward further enhancing the equipment reliability, flexibility in transferring features between Gilat's products through modular design, lower power consumption that makes the Skystar Advantage ideal for SCADA and other outdoor use, integrating additional applications to further suit our customers' needs and cost reduction.

SKYSTAR 360E VSAT. The Skystar 360E VSAT offers two-way satellite based communication-enabling broadband and digital video broadcast applications. The Skystar 360E is designed for networking between a central hub and tens of thousands of locations across wide geographical areas. The Skystar 360E is to be used by companies that control their own dedicated hub or that work with shared hub operators. Applications for companies using the SkyBlaster 360E include the following:

o Enterprises - Two-way interactive Internet Protocol communications, reliable software distribution, Internet and Intranet access, which means communicating between and among VSATs, video conferencing, corporate training and voice over IP enabling an integrated telephony and data solution over the same platform;

o Retail Businesses - credit, debit and check authorizations, point-of-sale transactions, inventory management and check authorizations, point-of-sale transactions, inventory management and hotel and airlines or other reservations systems;

o Banking and Financial Services - stock market and financial transactions, ATM's, financial data broadcasts and a electronic or "floorless" stock exchange; and

o Government Uses - lottery transactions, long-distance training and SCADA line monitoring.

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Skystar 360E Network Architecture

ARCHITECTURE. The Skystar 360E star network consists of a central hub, many VSAT terminals based in remote locations, and a satellite channel. The hub consists of base band equipment and a radio frequency terminal. Each remote terminal is composed of a small outdoor antenna, an outdoor unit and an indoor unit. The indoor unit is a stand-alone box that connects to the user's PC via an Ethernet LAN.

At the hub, the base band equipment controls the satellite transmission and interfaces with the customer's data equipment. An advanced, user friendly Network Management System (NMS) provides centralized monitoring and control, using statistics, alarms, network configuration and report generation. Corporate content is sent from the company's headquarters to the hub where it is uploaded and distributed to remote locations via satellite. Information can be sent to a single location, a group of locations or all locations. Delivery confirmation and other data, including file uploads, are sent back to headquarters via the satellite return channel.

KEY FEATURES

o Star Topology - The Skystar 360E is designed to support connectivity from a central hub to many remote locations.

o DVB Outbound - The Skystar 360E outbound carrier complies with DVB standards.

o Superior Inbound Coding - Intelligent coding algorithms and modulation techniques enable efficient usage of satellite bandwidth.

o Stand Alone Remote Unit - Client software is already embedded in the box. There is no need for external software for terminal operation.

o Extensive Internet Protocol Capabilities - The Skystar 360E can function in a variety of Internet Protocol environments and supports a wide range of Protocols and applications.

o Centralized Network Management - Network management is carried out from the hub. Remote terminals can be monitored from a central location.

o Rapid Deployment - Terminals can be set up easily across multiple locations.

o Proven Technology - Gilat's interactive VSAT terminals have already been installed and are operating

successfully in thousands of locations worldwide.

SKYWAY(TM) SERIES OF RF TRANSCEIVERS. A transceiver is a radio transmitter-receiver that uses many of the same components for both transmission and reception. The SkyWay high-power series of transceivers provide a solution for Single Channel Per Carrier and Multiple Channel Per Carrier VSAT terminals, and small-to-medium and medium-to-large Internet, voice, data, and video VSAT networks. This series of transceivers operate in the following frequencies:
C-band, extended C-band and Ku band.

ARCHITECTURE. The SkyWay series of RF transceivers consist of an indoor unit, an outdoor unit, a low noise amplifier down converter that converts between the high frequency for satellite and the lower frequency used by the indoor unit, a low noise block and, depending upon the application, a Solid State Booster indoor unit controls outdoor unit functions through a front panel keypad.

FEATURES. All the frequency converters use phase-locked oscillators, locked on the same frequency reference source. The Solid State Booster contains a high power amplifier. The industry standard 70 MHz modem interface provides a straightforward connection to most modems. Auxiliary outputs for transmit and receive signals permit direct monitoring of intermediate frequency signals. The built-in processors and software provide full control over the transceiver system. Monitor and control functions include transmit mute, frequency-set, alarm indication, output threshold, and external fault indication from the Solid State Booster. Full access is possible either through the front panel or an RS232/RS422 port.

VSATS AS TELEPHONY PRODUCTS

FARAWAY VSAT. Gilat and COMSAT RSI were parties to a joint venture for the development of the FaraWay VSAT, a satellite telephony VSAT, which provides voice and data services via satellite to remote locations and other areas that lack adequate telecommunications infrastructure. FaraWay VSATs are intended to provide:

o a reliable telecommunications network (with fax, telephone and data capabilities) for corporate, governmental and business users in developing countries that have minimal or no telecommunications infrastructure;

o multi-channel toll-quality telephone or digital trunking service to geographically isolated rural residential areas in developing countries; and

o cost-effective telephone and data service that can be installed quickly for remote installations (e.g., oil and gas exploration sites, small rural government agencies, public call offices and new factories).

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ARCHITECTURE. The FaraWay telephony product employs a unique VSAT architecture and satellite access scheme. As illustrated above, the product architecture permits connections to either private telephone equipment, pay telephones, private or public switches connecting the product to a single telephone line or a public switch connecting the product to many lines and data terminals, as well as to any combination of this equipment. High-speed data links can be established on a permanent basis or on demand, in a full mesh configuration.

The remote terminal of the FaraWay includes a dish antenna (typically 1.8 to 3.7 meters in diameter), an outdoor unit and an indoor unit. The indoor unit connects directly to subscribers' telephone equipment central office or data networks. The FaraWay hub, which may be connected to a public switch telephony network ("PSTN") or data networks, such as Internet access or connection to other servers), includes a large dish antenna (typically 3.7 to 13 meters in diameter), radio frequency electronics, a network resource and call-processing controller, and a Network Management System ("NMS") which includes call accounting files. The network resource controller assigns satellite frequencies to the equipment at both ends of the communication link; the NMS monitors and controls the overall network and also provides data for external network billing; and the traffic terminal provides the hub's interface to the public switch, voice or data network.

FEATURES. The FaraWay VSAT offers a cost-effective, flexible solution for connecting multiple telephone lines from a public switch to a local switch or directly to subscribers' premises via satellite and to support voice, fax and high data rate applications. The product features include: Ku-band and C-band and extended Ku-band and C-band frequency operation; flexible interfaces and telephony signaling support; support of up to 330,000 calls per hour; and ITU-approved 16 and 8 kilobit per second voice encoding.

In 2002, we developed an integration between the high rate models and our FaraWay VSAT, allowing the FaraWay network to support on-demand data links of up to 5 Mbps. This development has enabled high-rate data applications such as video conferencing and high volume file transfers. We also completed the development of a new voice card that supports four voice channels on a single card, reducing the price of each telephony line per VSAT and expanding the capacity of voice channels per VSAT to up to sixteen.

DIALAW@Y IP VSAT. Our DialAw@y IP VSAT product is intended to provide inexpensive, toll quality telephone service including voice and fax communication bundled simultaneously with high speed Internet access. This product is targeted for small businesses and villages in remote or urban areas lacking an adequate telephone infrastructure. The product has many applications:

o Public Telecommunications - offering telecommunication services to remote locations such as: public call offices, pay phones and "always-on" internet access;

o Private Telephones - offering telephone, fax and Internet access for small offices and home offices, referred to in the industry as small office/home office users, remote businesses, farms and remote tourist sites;

o Standalone Phones - for emergency or rescue operations, rural roads and remote highways and as back up for ground-based telephony networks.

The DIALAW@Y has been designed to offer subscriber or pay telephone and public call offices with up to six lines. Our rural telephony product operates in a mesh configuration, in which the remote terminals communicate with one another in single satellite hop (meaning that the connection between the terminals passes only once through the satellite), or multi-star configuration, which involves several interconnection points to the public network. At the same time the DialAw@y IP offers "always on" high speed two-way Internet access. We believe that the cost benefits of the product meet the telephony needs of the targeted non-urban telephony users, as well as such users' current and future needs for Internet access.

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ARCHITECTURE. As illustrated above, a DialAw@y IP network consists of a central hub, PSTN and ISP gateways, satellite channels and remote terminals. A remote terminal consists of a small outdoor antenna (typically 0.98 to 1.2 meters), an outdoor unit and our indoor unit with one to six telephone lines. The hub consists of a radio frequency terminal and baseband equipment. The radio frequency terminal incorporates a large dish antenna (typically 3.7 to 11 meters) and radio frequency electronics equipment (up and down frequency converters, low noise amplifiers and high power amplifiers). The baseband includes a Hub Satellite Processor handling the satellite communications, a Hub Voice Processor be connected to the PSTN using a digital E1 line, a Hub Protocol Processor connected to an internet service provider, and an NMS. The NMS monitors and controls all the remote terminals and the hub equipment. The hub design permits easy incorporation of new features. The hub station is the point of presence for Internet traffic, which means that it is the gateway to the user's connection to the Internet. Telephony traffic can be also routed to regional gateways, which can utilize satellite or terrestrial infrastructure.

FEATURES. Our DialAw@y IP VSAT product offers full support of telephone line services, including flexible adjustment to various payphones, an integrated telephony prepaid platform, high speed Internet access, full mesh architecture, call data processing, low cost, simple installation and operation, high hardware reliability, remote control and monitoring; and low power consumption.

Our current development efforts for the DialAw@y IP are directed toward solutions such as voicemail integration, prepaid cards for internet usage, improving IP features, quality of service and the user experience for DialAw@y IP customers.

VSATS FOR CONSUMERS

SKYBLASTER 360 VSAT. The SkyBlaster line of products VSAT replaced the SkySurfer VSAT. Unlike the SkySurfer, which provided only one direction of connectivity via a satellite and the other via a dial-up modem, the SkyBlaster 360 provides two-way connectivity, with both directions of connectivity via satellite. The SkyBlaster 360 is designed for consumers and home offices and small business offices that want high bandwidth services and do not have a terrestrial high-speed infrastructure available to them. Our VSAT technology is ideal outside metropolitan centers because geographic distances do not hinder our ability to provide the high-speed infrastructure that is unavailable otherwise. The SkyBlaster 360 consists of a DVB receiver card and a satellite transmitter as a return channel. The satellite transmitter is in the form of a stand-alone external modem. The external modem is substantially easier to install than the Personal Computer card used in previous models. We previously released to StarBand a preliminary model of this external modem.

The consumer-friendly external modem (approximately 12 inches x 12 inches x 4 inches wide) sits near a user's personal computer and provides two-way connectivity for Internet access as well as for content delivery and other multicast and interactive applications.

The SkyBlaster 360 features adaptable capacity of up to 52.5 megabits per second ("Mbps") downstream and 153.6 kilobits per second ("Kpbs") for the return channel. It can be used with either an Ethernet connection or a USB port, and is compatible with Windows 98SE, Windows Me, Windows 2000 and Windows XP.

The SkyBlaster 360 enables reliable, high-speed, bandwidth-intensive content delivery applications including the following:

o Consumer Internet access;

o High-speed Intranet and Extranet. Extranet enables sources outside an enterprise such as suppliers, access to only select portions of a network and Internet connections;

o High-speed Internet access;

o Business TV such as conferences, classes and seminars; and

o Interactive learning that enables companies to conduct a single class to employees located throughout a single continent.

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ARCHITECTURE. A SkyBlaster 360 star network consists of a central hub, many VSAT terminals, and a two-way satellite channel. The hub consists of base-band equipment and a radio frequency terminal. Each remote terminal is composed of a small outdoor antenna, an outdoor unit and an indoor unit. The indoor unit is a stand-alone box that connects to the user's PC.

At the hub, the base-band equipment controls the satellite transmission and interfaces with the Internet and various servers. An advanced, user friendly Network Management System provides centralized monitoring and control of the entire system including statistics, alarms, status reports, network configuration and trouble-shooting of all the hub components and remote VSATs. Content from the Internet or from the various servers at the hub is transmitted from the hub to the remote stations. Information can be sent simultaneously to a single location, which is referred to as unicasting, a group of locations, which is referred to as multicasting, or all locations, which is referred to as broadcasting. Delivery confirmation and other data, including file uploads, are sent back to headquarters via the satellite return channel.

KEY FEATURES

o STAR TOPOLOGY - Specially designed to support connectivity from a central hub to thousands of remote locations.
o DVB-S OUTBOUND - The outbound carrier is DVB-S (MPE) compliant and is scalable from 2.5Mbps to 52.5Mbps. It can also be multiplexed into an existing Direct to Home (DTH) carrier.
o VSAT IN A PC - The VSAT houses the transmitter and receiver. A USB or 10 base-T Ethernet interface connects the VSAT to the PC.
o CENTRALIZED NETWORK MANAGEMENT - Network management is carried out from the hub. Remote terminals can be monitored from a central location.
o EXTENSIVE IP CAPABILITIES - The VSAT can function in a variety of IP environments and supports a wide range of IP protocols and applications.

o RAPID DEPLOYMENT - Any site within the satellite footprint can be immediately connected to the network. The unique design allows a single team to install up to three remote sites per day.
o PROVEN TECHNOLOGY - Gilat's VSAT terminals have already been installed and are operating successfully in thousands of locations worldwide.
o HOST SOFTWARE - Performance enhancing client applications implemented on the PC accelerate traffic at both the TCP and HTTP layers.

We introduced the SkyBlaster 360 in June 2000.

VSAT NETWORK SERVICES

In our two primary geographic markets, the United States and Europe, we provide full network services through our network management centers ("NMC"), in addition to product sales. We offer a full spectrum of services, from installation and maintenance services to comprehensive service offerings in which we package the VSAT system with installation, network operations, maintenance and access to satellite transponder capacity. Our services include the following, as further detailed below:

o network analysis;

o network implementation;

o shared hub services;

o network operations;

o maintenance;

o customer technical services; and

o access to satellite capacity.

In addition, we provide network services in Argentina and support for network services in India.

NETWORK ANALYSIS. Network analysis involves designing the system in response to specific customer needs, determining critical system parameters, such as data protocols and network response times, assisting in generating component and subsystem specifications for the network's hardware, hub requirements (private or shared) and satellite capacity.

NETWORK IMPLEMENTATION. The network implementation process covers hub installation and network rollout, which entails installing and connecting all of the remote VSAT locations to the network. Network rollouts are planned and managed by Gilat's program management teams. A program manager serves as the customer's single point of contact and is responsible for delivering the network on time, on budget and to specification.

Many of the activities for installing a VSAT network take place at the customer's facilities, such as site survey, site preparation and installation of ground, roof, or wall-supported mounts with lightning protection, connection of the outdoor unit and the indoor unit to the antenna and Inter-Facility Link ("IFL") cable, powering up the system, pointing the antenna, initializing the VSAT and confirming proper operation with the hub, connecting the VSAT with the customer's local equipment (such as LAN or point-of-sale), and providing an orientation to the local customer personnel. A typical installation can be completed in four to six hours.

Hub installation services vary depending on whether the customer's network involves a private hub or use of one of our shared hub facilities in McLean, Virginia, Chicago, Illinois, Atlanta, Georgia, Germany, the Czech Republic or Argentina.

We currently use in-house personnel for hub installation and third parties to perform most VSAT installations. The program manager, working with our in-house implementation staff, insures that our third-party installation teams arrive at the customer's site on schedule and are equipped with the necessary equipment to complete the installation. The third-party installers are trained and certified on the Gilat hardware platforms.

SHARED HUB SERVICES. The hub is the most costly and complex component of a VSAT system. Some customers prefer to outsource the management and operation of the hub, either by leveraging our competency in managing networks or by gaining additional cost efficiencies through sharing the hub hardware and operations costs with multiple customers. Gilat presently staffs its primary shared hubs in the United States, Germany and Argentina with a highly specialized technical staff on a 24-hour basis. Our shared hub service typically includes use of hardware, maintenance, ground-based backhaul circuits, satellite uplinking and operations for which the customer pays a monthly fee.

NETWORK OPERATIONS. Our network operations services coordinate and manage the operations of customers' networks and monitor the quality of services delivered on a 24-hour basis from one of our two NMCs. Our largest NMC is located in McLean, Virginia, and is staffed by over 40 technicians who are trained in network fault isolation, problem resolution and customer service. We also have NMCs in Argentina. When customers experience an outage on their network, they call the NMC, where a trained professional, using proprietary monitoring and control technology, will work to restore service. In instances in which service cannot be restored through the troubleshooting process, the NMC technician will dispatch one of our third-party field service technicians to repair or replace the on-site hardware and restore operations to the site.

MAINTENANCE. Once an NMC technician determines that a field service dispatch is required to fix a problem, our maintenance and logistics organizations provide service to the customer. We offer a variety of maintenance plans to support our customer networks. All of the plans include toll-free trouble reporting service from one of our NMCs, field service, replacement of equipment, warehousing of spare parts, shipping and repairs. The objective is to provide an on-site response within an average of four hours for most sites. In the United States, we have contracted with IBM-TSS, a third-party repair service provider, to operate nationwide service centers that are staffed with Gilat-trained and certified field service technicians. Other trained and certified third-party vendors are contracted in our international service markets.

Our maintenance services are supported by our internal logistics and repair organization, which is responsible for stocking parts [in warehouses in the United States, Europe and Argentina.]

CUSTOMER TECHNICAL SERVICES. Our technical services group includes engineering test and support services during the project implementation phase and on-going telephone and on-site support for complex networking issues. The customer technical services group provides application troubleshooting, network optimization, customer training, and documentation services.

PROTOCOLS AND METHODOLOGIES. The development of new software protocols has resulted in improved use of available network capacity and decreased delays in transmission of information. Our networks support multiple protocols simultaneously, including SDLC, Bisync, X.25, X.3/X.28/X.29 PAD, Token Ring LLC, Ethernet LLC, X.25 Broadcast and TCP/IP. The performance of these protocols across satellite bandwidth is optimized by techniques such as TCP/IP "spoofing," which improves data throughput efficiency. In addition, our VSAT networks have built-in protocol conversion capabilities, including X.25 to Async PAD, SDLC to Token Ring, Bisync to Token Ring, X.25 to Bisync, X.25 to SDLC and TCP/IP over Ethernet to TCP/IP over Token Ring, which allow our VSAT networks to operate with multiple protocols without the purchase of additional equipment.

MARKETING, DISTRIBUTION AND STRATEGIC ALLIANCES

MARKETING AND DISTRIBUTION

We use both direct and indirect sales channels to market our products and services. Our marketing activities are organized geographically, with groups, subsidiaries or affiliates covering North America, Europe, Latin America, Asia and the rest of the world. In North America most of our revenues are generated by our direct sales force, although value-added resellers and distributors account for some of our largest networks. In Europe, we rely primarily on Satlynx, our joint venture with SES Global. In Latin America, we generate revenues of equipment sales and service revenues directly and through rStar. In Asia and the rest of the world, we rely primarily on local agents and distributors. In all markets, we occasionally work with system integration companies for large and complex projects.

Our sales teams are comprised of account managers and sales engineers, who are the primary account interfaces and work to establish account relationships and determine technical and business requirements for the network. These teams also support the other distribution channels with advanced technical capabilities and application experience. Sales cycles in the VSAT network market are lengthy and it is not unusual for a sale to require 18 months from initial lead through signing of the contract. The sales process includes several network design iterations, network demonstrations, pilot networks comprised of a few sites, and in some cases special software development, integrations with third party equipment for complete solution offerings, which is completed before contract signing. For VSAT networks sold as a complete service offering, the sale cycle is typically shorter and can be as low as 90 days from the initial lead through the signing of the contract. Some of the larger government bids in Latin America include service provision for up to six years.

As of December 31, 2002, we had a sales and marketing group of 100 full-time employees. Approximately 20% of the sales and marketing group is based in the United States, and approximately 33% is based in Israel. We currently have marketing and technical support staff in the United States and Israel. In addition, we maintain marketing and support offices in Colombia, Peru, Brazil, Mexico, South Africa, Australia, Philippines, Thailand, Kazakhstan and India, which provide ongoing marketing and technical support for our products for our strategic partners and their customers. These offices also work with our strategic partners to identify target markets and applications and define products to meet those needs. In addition, we have established representative offices in Beijing, Indonesia and the Ukraine to support our marketing efforts and support and coordinate local marketing offices in Europe and the Far East.

We also sell our products and services to postal, telephone and telegraph organizations and other major carriers, resellers and other companies in the United States and internationally who purchase network products and services from us for resale to their customers. PTTs and other major carriers employ substantial sales forces and have the advantage of being existing providers to many of our target customers, which makes marketing easier and increases awareness of customer needs.

The following table sets forth Gilat's revenues by geographic area for the periods indicated below as a percent of Gilat's total sales:

                                                   YEARS ENDED DECEMBER 31,
                                      ---------------------------------------------------
                                            2000             2001             2002
                                            ----             ----             ----
United States                              57.4%(1)         39.1%(1)         52.8%(1)
South and Central Latin America            21.5%(1)         30.5%            19.4%
Asia                                       12.6%(1)         13.1%(1)         11.8%
Europe                                      6.2%            12.6%             7.0%(1)
Africa                                      1.6%             4.3%             8.3%
Israel                                      0.1%             0.3%             0.6%

Other                                       0.6%             0.1%             0.1%

Total                                     100.0%           100.0%             100%

STRATEGIC ALLIANCES AND JOINT VENTURES

In addition to our direct and indirect sales channels, we have established certain key strategic marketing relationships and joint ventures, including the following:

SATLYNX S.A.. In April 2002, together with SES Global (SES Americom's affiliate), we announced the formation of a new company that provides two-way satellite broadband communications services to enterprises, consumers and Soho users throughout Europe. We and SES Global contributed cash and in kind contributions, which included one of our subsidiaries in Holland, existing facilities, transponders, hubs, terminals, other technology and technical as well as marketing

assistance. Gilat transferred six of its European subsidiaries (in Italy, Germany, Czechoslovakia, England, Holland and France) such that substantially all of the service-providing business of Gilat in Europe has been transferred to this joint venture. The transaction between Gilat and SES Global was completed on May 24, 2002. We recognized equity losses in the amount of $4.1 million, representing the investment in Satlynx, certain receivables and guarantees provided to Satlynx. The future of Satlynx is contingent upon its ability to raise additional financing.

STARBAND. In March 2000, we established a joint venture named StarBand (formerly known as Gilat-to-Home, Inc.) with MSN, EchoStar and ING, to provide broadband Internet access via satellite to residential, Soho and small business customers in North America. MSN and EchoStar originally invested $50,000,000 each and ING has invested $25,000,000 in cash in StarBand in exchange for both senior convertible preferred and common shares equal to 17.7%, 17.7% and 7.2%, respectively, of the outstanding capital of StarBand. Following an additional investment by EchoStar, Gilat, through Spacenet, owns approximately 35.0% of StarBand's outstanding shares.

We have entered into a master supply and services agreement to support the performance by StarBand of a supply agreement with MSN. Under this agreement, we provide StarBand with, among other things, the following:

o network operations equipment and software necessary for StarBand' network to operate;

o use of facilities in Virginia and Georgia; and

o certain research and development support in connection with hardware, equipment and software maintenance.

StarBand purchases most of the equipment and services necessary for its business exclusively from us, and we grant it exclusive rights to use the technology that it requires to provide its service to its customers in the United States and Canada. We have agreed not to compete with StarBand's business in the North American residential, Soho and small business market, and StarBand has agreed not to compete with us in the area of data delivery for enterprise network applications for our VSATs.

On May 31, 2002, StarBand filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Since that time, we have provided to StarBand approximately $7 million of "debtor in possession" financing, the majority of which has been in the form of transponder capacity, and additional financing of approximately $18 million. There is no guarantee that StarBand will emerge from bankruptcy.

KNOWLEDGEBROADCASTING.COM. On March 6, 2000, we completed a $10 million investment transaction with Knowledge Net Holdings LLC, a subsidiary of Knowledge Universe, Inc., in exchange for 10 million common units (approximately 5.6% of the outstanding units) of KnowledgeBroadcasting.com LLC ("KBC"), warrants and certain commercial and other rights. KBC was formed to distribute knowledge-based content using interactive broadband satellite and other technologies. We are also entitled to appoint one director to the board of KBC as long as we hold a minimum number of KBC units. KBC is currently focusing on developing and marketing a new technology platform for content delivery and presentation.

As part of this transaction, for five years, KBC may purchase equipment and services from us at favorable prices. For up to two years, to the extent that we do not exercise the Warrant, KBC may pay for up to $20 million of equipment and/or services with KBC common units valued at one dollar per unit (such number of units to be deducted from the total available number of Warrant Units). We also provided KBC with a five-year warrant to purchase approximately 191,000 of our ordinary shares at a purchase price of $157.05 per share. This warrant becomes effective only when KBC provides certain knowledge-based content Gilat. Such content has not yet been made available to Gilat.

In June 2001, we received $2.5 million from KBC as a result of a cash distribution to shareholders. In September 2001, we wrote-off the $7.5 million investment. For more information, please see Item 5: "Operating and Financial Review and Prospects - General - Restructuring, Write-offs and Other Significant Charges."

GTH LA ANTILLES. We initiated our rural telephony project in 1997 through our then wholly owned subsidiary, GTH LA Antilles, previously named Global Village Telecom N.V. GTH LA Antilles was established to design, deploy, manage and operate, alone or with local partners, rural telephony communications networks to provide fixed-site, basic telephony service to rural and remote markets in developing countries, as well as other markets for public telephony service.

In April 1998, GTH LA Antilles completed a $40 million private placement with an international group of investors (the "Other Investors"), as a result of which our interest in GTH LA Antilles was reduced to a minority. We invested $2.5 million in GTH LA Antilles as part of the private placement. We also provided a $7.5 million loan convertible into common shares equal to approximately 15% of GTH LA Antilles.

In April 2000, we completed a share exchange transaction in which we acquired all the outstanding shares of the Other Investors in exchange for the transfer to a new company organized by the Other Investors of GTH LA Antilles' entire right and interest in two Brazilian subsidiaries, which were formed to provide telephone and other telecommunications services in South Central Brazil. All other agreements among the parties under the original private placement transaction were terminated and the Other Investors were given the right to the name and marks "GVT" and "Global Village Telecom." As part of the April 2000 transaction, we also provided the Other Investors' new company with a $40 million loan in exchange for a note convertible into common shares equal to approximately 9.1% of this new company's then outstanding shares.

In 2002, the Company recognized an impairment of the above long term loan in an amount of 39.4 million. For more information please see Item 5:
"Operating and Financial Review and Prospects-General-Restructuring Changes, Write-offs and Other Significant Charges."

As a result of the transaction, we own substantially all of the outstanding shares of GTH LA Antilles. We also renamed the company "Gilat-To-Home Latin America (Netherlands Antilles) N.V." from its previous name Global Village Telecom (Netherlands Antilles) N.V. We have been marketing our DialAw@y IP VSAT product, and other voice products in Latin America, through GTH LA Antilles and GTH LA Antilles' local partners. Subject to certain governmental and other consents and approvals where needed, and subject, further, to the sale of certain portions of our Latin America business to rStar, we operate in Latin America through subsidiaries.

RSTAR. In January 2001, following a tender offer, we became the owners of 51% of the outstanding shares of rStar at a cost of approximately $51 million. In May 2001, rStar issued and delivered to Gilat 19,396,552 shares of rStar Common Stock, in full satisfaction of rStar's outstanding capital lease obligations to Spacenet in the amount of approximately $ 45 million, which resulted in Gilat increasing its share holdings in rStar to approximately 66%. In August 2002, we completed a transaction in which we acquired additional shares of rStar and became approximately 85% of rStar. As part of this transaction, we sold to rStar the exclusive rights in Latin American countries (excluding Mexico, but including, among others, Brazil, Argentina, Colombia, Peru and, subject to certain restrictions, Chile) (i) to implement, operate and market broadband Internet access services and voice services to residential consumers and Soho subscribers, (ii) to provide a bundled product with direct-to-home television service using a single satellite dish, and (iii) to provide such new technologies and products related to the foregoing as Gilat may in the future develop or make available to StarBand, which shall be offered to rStar upon commercially reasonable terms. In Mexico, rStar received only non-exclusive rights.

Under the acquisition agreement, rStar purchased the outstanding capital stock of StarBand Latin America in exchange for 43,103,448 shares of rStar common stock. StarBand Latin America was created to provide, through local subsidiaries, two-way always on, high-speed Internet access and telephony to residential and Soho customers in Latin America.

The acquisition agreement also provides that rStar stockholders, excluding Gilat and its corporate affiliates, will be entitled to a pro rata share of a special cash distribution that may equal, in the aggregate, $10 million if the Latin American business transferred to rStar does not achieve certain earnings targets during each of the twelve-month periods ended June 30, 2003 and June 30, 2004.

In September 2001, the Company wrote off goodwill related to rStar in an amount of $50.6 million. The Company recorded an impairment in 2002 of the remaining goodwill of $3.1 million and an additional goodwill acquired during 2002 in the amount of $13.1 million. For more information, please see Item 5:
"Operating and Financial Review and Prospects - General - Restructuring Charges, Write-Offs and Other Significant Charges".

BACKLOG

The 2002 year-end backlog for equipment sales and revenues from multi-year service contracts for our VSAT products was approximately $250 million, up from approximately $230 million at the year-end 2001. Approximately $65 million of this backlog is related to two bids awarded to us by the Ministry of Communications in Colombia.

PATENTS AND INTELLECTUAL PROPERTY

We currently rely on a combination of patent, trade secret, copyright and trademark law, together with non-disclosure agreements and technical measures, to establish and protect proprietary rights in our products. We hold a U.S. patent for a commercial satellite communication system that allows random access to allotted frequency and time segments on satellites. The patented system allows our customers to utilize lower cost networks, while maintaining sufficient throughput and response times. We have filed applications for registration of additional patents that include improvements to our satellite access scheme.

We believe that our patents are important to our business. We also believe that the improvement of existing products, reliance upon trade secrets and unpatented proprietary know-how as well as the development of new products are generally as important as patent protection in establishing and maintaining a competitive advantage. We believe that the value of our products is dependent upon our proprietary software and hardware remaining "trade secrets" or subject to copyright protection. Generally, we enter into non-disclosure and invention assignment agreements with our employees, subcontractors and certain customers and other business partners. However, we cannot assure that our proprietary technology will remain a trade secret, or that others will not develop a similar technology or use such technology in products competitive with those offered by us.

We periodically receive communications asserting that our products or applications thereof infringe third party patent copyright or other intellectual property rights. We also send similar communications to third parties which we believe may be infringing our patents. See "Item 8: Financial Information - Legal Proceedings".

While we do not believe we are currently infringing any intellectual property rights of third parties, we cannot assure that other companies will not, in the future, pursue claims against us with respect to the alleged infringement of patents, copyrights or other intellectual property rights owned by third parties. In addition, litigation may be necessary to protect our intellectual property rights and trade secrets, to determine the validity of and scope of the propriety rights of others, or to defend against third-party claims of invalidity. Any litigation could result in substantial costs and diversion of resources and could have a material adverse effect on Gilat's business, financial condition and operating results.

We cannot assure that additional infringement, invalidity, right to use or ownership claims by third parties, or claims for indemnification resulting from infringement claims will not be asserted in the future. If any claims or actions are asserted against us, we may seek to obtain a license under a third party's intellectual property rights. We cannot assure, however, that a license will be available under terms that are acceptable to us, if at all. The failure to obtain a license under a patent or intellectual property right from a third party for technology used by us could cause us to incur substantial liabilities and to suspend the manufacture of the product covered by the patent or intellectual property right. In addition, we may be required to redesign our products to eliminate infringement if a license is not available. Such redesign, if possible, could result in substantial delays in marketing of products and in significant costs. In addition, should we decide to litigate such claims, such litigation could be extremely expensive and time consuming and could materially adversely affect our business, financial condition and operating results, regardless of the outcome of the litigation.

CUSTOMERS

The majority of the customers for our products and services are large retail and consumer-oriented businesses, including retail and consumer distribution, convenience stores, restaurants and hospitality establishments, gas stations, hotels, brokerage, banking and financial services providers, communications companies, lotteries, automotive and governmental institutions. We sell our products directly to these customers or indirectly through resellers. In general, networks for these customers range from approximately 100 to 4,000 sites, although some customers have satellite data networks considerably smaller and others, considerably larger than this range. For example, GTECH, a lottery provider in the United States, has deployed more than 25,000 Skystar Advantage VSATs about the world. In Peru, Gilat has deployed 6,000 Dial@way IP VSATs providing telephony and Internet services. In South Africa, Gilat has been contracted to deploy up to 26,000 Skystar 360E Broadband VSATs over the next five years.

As of December 2002 StarBand had approximately 40,000 subscribers and is currently the biggest customer of our SkyBlaster 360 VSAT.

During 1998, we were selected as subcontractor, under a prime contract awarded to MCI Corporation, for the provision of VSAT services to the United States Postal Service (the "USPS"). Although the contract does not require the USPS to purchase specific quantities at specific dates, the USPS program is has initially linked 10,000 small associated office locations throughout the United States, with potential growth to 26,000 sites during the ten-year program. Our VSAT services are providing the USPS with a comprehensive upgrade to existing terrestrial dial-up services now in use at post offices across the United States. The network supports a wide range of applications, including point-of-sale and credit card processing, package delivery confirmation, remote monitoring, software and data file downloading, IP multicasting, and multimedia broadcast. The network provided the USPS with world-class connectivity to all locations, enabling a state-of-the-art customer service infrastructure. As of December 2002, we have installed VSATs at approximately 11,000 small associated office locations. In addition, approximately 7,000 VSATs are being installed as back-up services to the existing MCI WorldCom Frame Relay network at large associated office locations. At present, MCI WorldCom is under reorganization in accordance with Chapter 11 of the U.S. Bankruptcy Code.

COMPETITION

The network communications industry is highly competitive and the level of competition is increasing. As a provider of data network products and services in the United States and internationally, we compete with a large number of telecommunications service providers. Many of these competitors have significant competitive advantages, including long-standing customer relationships, close ties with regulatory and local authorities and control over connections to local telephone networks. This increasingly competitive environment has put pressure on prices and margins. To compete effectively, we emphasize the price competitiveness of our products as compared to products offered by ground-based and other satellite service providers, the advantages of satellite data networks in general, our network quality, our customization capability, our offering of networks as a turnkey service rather than as an equipment sale and our provision of a single point of contact for products and services.

We have encountered strong competition from major established carriers such as AT&T, MCI WorldCom, Sprint, British Telecom, France Telecom, Deutsche Telekom and global consortia of PTTs and other major carriers, which provide international telephone, private line and private network services using their national telephone networks and those of other carriers. Such carriers also offer technological solutions for customer networks, including ISDN lines and frame relay networks. Fiber optic cable is increasingly available for wide bandwidth networks in the United States and Western Europe and competitive issues often involve tradeoffs among price, various features and customer needs for specialized services or technologies. We are facing increasing competition from ground-based telecommunications service providers that use frame relay, fiber optic networks and digital network switching to provide competitive network offerings.

Our VSAT networks generally have an advantage over terrestrial networks where the network must reach many locations over large distances, where the customer has a "last mile" or congestion problem that cannot be solved easily with terrestrial facilities and where there is a need for transmission to remote locations or emerging markets, as discussed more fully above. By comparison, ground-based facilities (e.g., fiber optic cables) often have an advantage for carrying large amounts of bulk traffic between a small number of fixed locations. However, a customer's particular circumstances, the pricing offered by suppliers and the effectiveness of the marketing efforts of the competing suppliers also play a key role in this competitive environment.

The major telecom carriers also serve as resellers of our products and services, and are an increasingly important distribution channel in Asia and Latin America.

Our principal competitor in the supply of VSAT satellite networks is Hughes Network Systems, which offers a full line of VSAT products and services and which obtains most of its satellite capacity on the satellite system operated by its affiliates Hughes Galaxy and PanAmSat. In competing with Hughes Network Systems, we emphasize particular technological features of our products and services, our ability to customize networks and perform desired development work, the quality of our customer service and our willingness to be flexible in structuring arrangements for the customer. In addition, we face competition on all of our product lines from ViaSat, Inc.

We expect our principal competition in the VSAT-based consumer broadband arena to come from three terrestrial broadband service technologies:
cable, DSL and fixed wireless. Recently, potential competitors have

announced the introduction of two-way satellite Internet products and services. We believe that our more mature product will allow us to compete effectively in this market.

The VSAT-based broadband solution can be differentiated from the terrestrial competition by two primary characteristics: rapid availability and more efficient distribution. Unlike cable and DSL, the satellite-based solution provided by StarBand is immediately available upon installation of the equipment at a consumer's home. Additionally, the broadband service offered by StarBand is expected to offer subscribers broadcast and multicast broadband content without last-mile bottlenecks often experienced with terrestrial networks.

We may experience increased competition in the future from existing or new competitors in the hardware, services and the consumer broadband spheres that may adversely affect our ability to continue to market our products and services successfully. We believe that we have been able to compete successfully with larger telecommunications companies in part by entering into strategic joint development and marketing relationships with major companies such asSES Global, by developing new products such as Skystar 360E and by emphasizing low-cost product and service features and functions that meet the needs of customers in the markets in which we compete. See Item 4: "Information on the Company -- Patents and Intellectual Property."

We believe that our major competitors have the resources available to develop products with features and functions competitive with or superior to those offered by us. In addition, the entry of new companies into the market or the expansion by existing competitors of their product lines could have an adverse effect on us. However, we believe that our primary competitive advantage is our ability to provide products with relatively low overall cost and high functionality. We also compete on the basis of the performance characteristics of our products and our ability to customize certain network functions. We cannot assure that our competitors will not develop such features or functions, that we will be able to maintain a cost advantage for these products or that new companies will not enter these markets.

We also compete with other companies that offer communications networks and services based on other technologies (e.g., ground-based lines and frame relay, radio transmissions, point-to-point microwave) that can be competitive in terms of price and performance with our products. For example, there is a competing technology for a unidirectional VSAT system that uses a lower-cost remote terminal but requires more satellite space segments capacity than our unidirectional VSAT products. See Item 3: "Key Information -- Risk Factors; Competition in the network communications industry."

GOVERNMENT REGULATION

REGULATORY OVERVIEW

The international telecommunications environment is highly regulated. As a provider of communications services in the United States, we are subject to the regulatory authority of the United States, primarily the FCC. We are also subject to regulation by the national communications authorities of other countries in which we provide service. Each of these entities can potentially impose operational restrictions on us. The changing policies and regulations of the United States and other countries will continue to affect the international telecommunications industry. We cannot predict the impact that these changes will have on our business or whether the general deregulatory trend in recent years will continue. We believe that continued deregulation would be beneficial to us, but also could reduce the limitations facing many of our existing competitors and potential new competitors.

We are required to obtain approvals from numerous national and local authorities in the ordinary course of our business in connection with most arrangements for the provision of services. The necessary approvals generally have not been difficult for us to obtain in a timely manner. However, the failure to obtain particular approvals has delayed, and in the future may delay our provision of services. Moreover, it is possible that any approvals that may be granted may be subject to materially adverse conditions.

UNITED STATES REGULATION

All entities that use radio frequencies to provide communications services in the United States are subject to the jurisdiction of the FCC under the Communications Act of 1934, as amended (the "Communications Act"). The Communications Act prohibits the operation of satellite earth station facilities and VSAT systems such as those

operated by us except under licenses issued by the FCC. Major changes in earth station or VSAT operations require modifications to the FCC licenses, which must also be approved by the FCC. The licenses we hold are granted for ten-year terms. The FCC generally renews satellite earth station and VSAT licenses routinely, but we cannot guarantee that our licenses will be renewed at their expiration dates or that such renewals will be for full terms. In addition, certain aspects of our business may be subject to state and local regulation including, for example, local zoning laws affecting the installation of satellite antennas.

INTERNATIONAL REGULATION

We must comply with the applicable laws and obtain the approval of the regulatory authority of each country in which we propose to provide network services or operate VSATs. The laws and regulatory requirements regulating access to satellite systems vary from country to country. Some countries have substantially deregulated satellite communications, while other countries maintain strict monopoly regimes. The application procedure can be time-consuming and costly, and the terms of licenses vary for different countries. In addition, in some countries there may be restrictions on our ability to interconnect with the local switched telephone network.

POLITICAL AND ECONOMIC CONDITIONS IN ISRAEL

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

Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors and a state of hostility, varying from time to time in intensity and degree, has led to security and economic problems for Israel. However, a peace agreement between Israel and Egypt was signed in 1979 and, a peace agreement between Israel and Jordan was signed in 1994. Since 1993, several agreements between Israel and Palestinian representatives have been signed but since October 2000, there has been substantial deterioration in the relationship between Israel and the Palestinian Authority, which has resulted in increased violence. The future effect of this deterioration and violence on the Israeli economy and our operations is unclear. As of the date hereof, Israel has not entered into any peace agreement with Syria, Lebanon or other Arab countries except those mentioned above, and no prediction can be made as to whether any other agreements will be entered into between Israel and its neighboring countries. The ongoing violence between Israel and the Palestinians and tension between Israel and neighboring Syria and Lebanon may have a material adverse effect on our business, financial conditions or results of operations. Generally, male adult citizens and permanent residents of Israel under the age of 51 are, unless exempt, obligated to perform up to 43 days of military reserve duty annually (from May 2003, such obligation will be generally reduced to 36 days). Additionally, all such residents are subject to being called to active duty at any time under emergency circumstances. Some 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, no assessment can be made as to the full impact of such requirements on our workforce or business if conditions should change, and no prediction can be made as to the effect on us of any expansion or reduction of such obligations.

In addition, in the event and to the extent the recent armed conflict entered into by the United States and other countries in Iraq will impact Israel, our operations may adversely affected.

Israel's economy has been subject to numerous destabilizing factors, including a period of rampant inflation in the early to mid-1980s, low foreign exchange reserves, fluctuations in world commodity prices, military conflicts and civil unrest. The Israeli government has, for these and other reasons, intervened in various sectors of the economy employing, among other means, fiscal and monetary policies, import duties, foreign currency restrictions and control of wages, prices and foreign currency exchange rates. The Israeli government has periodically changed its policies in all these areas.

In addition, certain countries, companies and organizations continue to participate in a boycott of Israeli firms. We do not believe that the boycott has had a material adverse effect on us, but there can be no assurance that restrictive law, policies or practices directed toward Israel or Israeli businesses will not have an adverse impact on the expansion of our business.

TRADE AGREEMENTS

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

Israel and the European Union concluded a Free Trade Agreement in July 1975 that confers certain advantages with respect to Israeli exports to most European countries and obligates Israel to lower its tariffs with respect to imports from these countries over a number of years. In June 2000, Israel was admitted as an Associate Member of the European Union. In 1985, Israel and the United States entered into an agreement to establish a Free Trade Area that has eliminated all tariff and certain non-tariff barriers on most trade between the two countries. On January 1, 1993, Israel and the European Free Trade Association ("EFTA") entered into an agreement establishing a free-trade zone between Israel and the EFTA nations. In recent years, Israel has established commercial and trade relations with a number of other nations, (including Russia, the People's Republic of China, India and nations in Eastern Europe and Asia) with which Israel had not previously had such relations.

                                                   PLACE OF           OWNERSHIP
      COMPANY                                   INCORPORATION         INTEREST
------------------                            -----------------      -----------
Spacenet Inc.                                 United States              100%
rStar Corporation                             Delaware                    85%
Gilat Satellite Networks (Holland) B.V.       Holland                    100%
Satlynx S.A.                                  Luxembourg                  50%

PROPERTY AND EQUIPMENT

Our products are primarily designed, assembled, manufactured and tested at our facility in Petah Tikva, Israel. In April 1996, we moved to approximately 62,000 square feet of office, manufacturing and warehousing facilities in Petah Tikva, Israel, which was expanded by an additional 57,000 square feet at the end of 1997. We purchased approximately 93,000 square feet of additional facilities in 1997 for a contract price of approximately $17.4 million, including taxes and related expenses. We have paid the full amount of the purchase price and the construction was completed in 1999. In addition we have (i) purchased 34,120 square feet of additional space in an adjoining building, at a price of approximately $3.2 million; and (ii) acquired an additional 65,000 square feet of adjoining real property for future expansion. In 2000, we exercised our contractual option to acquire approximately 79,000 square feet of additional space, including parking and commercial space, at a price of approximately $16.6 million including taxes and related expenses. Our products are primarily designed, assembled, manufactured and tested at our facility in Petah Tikva, Israel. In April 1996, we moved to approximately 62,000 square feet of office, manufacturing and warehousing facilities in Petah Tikva, Israel, which was expanded by an additional 57,000 square feet at the end of 1997. We purchased approximately 93,000 square feet of additional facilities in 1997 for a contract price of approximately $17.4 million, including taxes and related expenses. We have paid the full amount of the purchase price and the construction was completed in 1999. In addition we have (i) purchased 34,120 square feet of additional space in an adjoining building, at a price of approximately $3.2 million. In 2000, we exercised our contractual option to acquire approximately 79,000 square feet of additional space, including parking and commercial space, at a price of approximately $16.6 million including taxes and related expense. The net book value of the facilities in Petah Tikvah is $71.5 million and such amount appears in the audited financial statements incorporated as part of this Annual Report on Form 20F. A recent valuation of the land and facilities valued the property at approximately $48.5 million. In accordance with SFAS 144, since the property is not presently for sale, the Company tested the recoverability of its facilities as part of a group of assets and determined that no impairment charge should be recorded as of December 31, 2002. If the Company is to put the facilities up for sale, it will in all likelihood realize the valued amount and in the fiscal year that it is put up for sale, will be required to record the difference between the carrying amount and the fair value as an impairment in the statement of operations, all in accordance with SFAS 144.

Our current manufacturing facilities have sufficient capacity to handle current demand. We continuously adjust our capacity based on our production requirements. We also work with third party vendors for the development and manufacture of components integrated into our products, as well as for assembly of components for our products. We have implemented a multifaceted strategy focused on meeting customer demand for our products

and reducing production costs. Our operations group, together with our research and development group, is working with our vendors and subcontractors to increase development and production efficiency in order to obtain higher component quantities at reduced prices.

We currently lease warehouse space in Petah Tikva (approximately 7,200 square feet) and in Kanot (approximately 12,200 square feet) at an aggregate monthly fee of $7,600.We have network operations centers at McLean, Virginia and Argentina and shared hub facilities in Chicago, Illinois, Argentina, Brazil, Peru and Colombia, from which we perform network services and customer support functions 24 hours a day, 7 days a week, 365 days a year. The network operations centers allow us to perform diagnostic procedures on customer networks and to reconfigure networks to alter data speeds, change frequencies and provide additional bandwidth.

Our facilities in Florida are located in Sunrise. In West Melbourne we lease approximately 31,000 square feet under a ten-year lease, which began May 1, 1997. Monthly rent is approximately $15,938. In Sunrise we lease approximately 9,000 square feet under a five-year lease agreement that terminates in February 2005. The Sunrise office serves our sale, finance and operations teams.

Our offices in McLean, Virginia originally comprised approximately 133,000 square feet, portions of which we sublease, such that the current monthly rental cost is approximately $239,000. These offices house our personnel and also contain one of our U.S. network operations centers. In June 2000 we purchased the land and building facilities used by Spacenet for a purchase price of approximately $24.3 million. In March 2001 we sold these premises for approximately $31.5 million (net obf related costs of approximately $1.5 million) and entered into a 15-year lease for this space, at an initial annual rent of approximately $3.5 million. In addition, we lease additional office space in McLean for Spacenet personnel comprising approximately 60,000 square feet at monthly rental of approximately $182,000. We also maintain space in Manassas, Virginia (through March 2003), Chicago, Illinois and Houston, Texas for sales and operations.

In 2000 and 2002, we purchased and developed facilities on approximately 140,400 square feet of land in Backnang, Germany, for approximately $13 million. As of May 24, 2002, these facilities are leased to Gilat Europe GmbH, one of the six Gilat subsidiaries sold to Satlynx. In June 2001, we entered into a mortgage and loan agreement with a German bank, secured by our Backnang facilities. The mortgage is for approximately $5.3 million, of which (i) approximately $0.9 million bears interest at 5.86% and is repayable over 5 years commencing July 2001 and (ii) approximately $4.4 million bears interest at 6.3% and is repayable quarterly over 20 years commencing July 2006. In addition, Satlynx has been granted an option to purchase the Backnang facility. See Item 4: "Information on the Company - Strategic Alliances and Joint Venture - SES Global".

We maintain offices in Santa Clara, California; Austin, Texas; Sunrise, Florida; Atlanta, Georgia; and in South America in Brazil, Argentina, Chile, Colombia, Mexico, and Peru, along with representative offices in Beijing, and Melbourne, Prague, Pretoria, Sao Paulo, Buenos Aires, New Delhi, Almaty, Kazahkstan, and small facilities in other locations.