10-Q 1 t10q-30198.txt 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 0-27029 RSTAR CORPORATION (Exact name of Registrant as specified in its charter) DELAWARE 91-1836242 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1560 SAWGRASS CORPORATE PKWY, SUITE 200 SUNRISE, FL 33323 (Address of principal executive offices) Registrant's telephone number, including area code: (954) 858-1600 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past (90) days. Yes Y No The number of shares of the issuer's Common Stock outstanding as of July 31,2003 was 104,529,864. 1

~~UNITED STATES~~ INDEX PART I -- FINANCIAL INFORMATION ------------------------------- ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONDENSED CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2003 (UNAUDITED) AND DECEMBER 31, 2002 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002 (UNAUDITED) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002 (UNAUDITED) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ITEM 4 DISCLOSURE CONTROLS PART II -- OTHER INFORMATION ---------------------------- ITEM 1. LEGAL PROCEEDINGS ITEM 2. CHANGES IN SECURITIES AND ~~EXCHANGE~~USE ~~COMMISSION~~OF PROCEEDS ITEM 3. DEFAULTS UPON SENIOR SECURITIES ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ITEM 5. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K SIGNATURES CERTIFICATIONS

~~Washington~~RSTAR CORPORATION FORM 10-Q QUARTER ENDED JUNE 30, D2003 PART I.C FINANCIAL INFORMATION ITEM 1. ~~20549~~FINANCIAL STATEMENTS RSTAR CORPORATION AND ITS SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (U.S. dollars in thousands) JUNE 30, DECEMBER 31, 2003 2002 ------------------ ------------------ UNAUDITED ASSETS Current assets: Cash and cash equivalents $ 3,815 $ 8,163 Restricted cash 1,863 1,416 Accounts receivables, net 16,165 15,542 Tax receivable 1,152 546 Other accounts receivable and prepaid expenses 2,760 2,876 Inventory 8,240 8,842 ------------------ ------------------ Total current assets 33,995 37,385 Long-term restricted cash 2,702 3,659 Long-term tax receivable 2,179 2,799 Long-term receivables 22,749 9,028 Property and equipment, net 14,462 15,673 Other assets, net 325 514 ------------------ ------------------ Total assets $ 76,412 $ 69,058 ================== ================== The accompanying notes are an integral part of the condensed consolidated financial statements.

~~FORM~~RSTAR CORPORATION AND ITS SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (U.S. dollars in thousands) JUNE 30, DECEMBER 31, 2003 2002 -------------------- ------------------- UNAUDITED LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term bank credit $ 330 $ 2,315 Current portion of capital lease obligations 1,448 1,809 Accounts payable 9,433 7,988 Due to related parties 20,811 23,480 Deferred revenues 1,865 1,823 Taxes payable 1,647 -- -------------------- ------------------- Accrued expenses and other liabilities 6,004 5,439 -------------------- ------------------- Total current liabilities 41,538 42,854 Long-term liabilities: Other long-term liabilities 1,627 1,893 Long-term deferred revenue 1,879 1,614 Long-term capital lease obligations 2,657 3,415 Long-term deferred tax 1,278 -- Liability for distribution to minority shareholders 5,000 5,000 -------------------- ------------------- Total long term liabilities 12,441 11,922 Stockholders' equity: Common stock, $0.01 par value authorized shares- 200,000,000 issued and outstanding shares 104,529,864 at June 30, 2003 and December 31, 2002 1,045 1,045 Additional Paid-in-Capital 248,227 248,227 Notes receivable from stockholders (312) (312) Treasury stock, at cost (9,979) (9,979) Accumulated other comprehensive loss 10 (198) Accumulated deficit (216,558) (224,501) -Q------------------- ------------------- Total stockholders' equity 22,433 14,282 -------------------- ------------------- Total liabilities and stockholders' equity $ 76,412 $ 69,058 ======================================== The accompanying notes are an integral part of the condensed consolidated financial statements.

ýRSTAR ~~QUARTERLY~~CORPORATION ~~REPORT~~AND ~~PURSUANT~~ITS TOSUBSIDIARIES ~~SECTION~~CONDENSED CONSOLIDATED STATEMENT OF INCOME (U.S. dollars in thousands) THREE MONTHS SIX MONTHS ENDED JUNE 30 ENDED JUNE 30 2003 2002 2003 2002 ------------- ------------ --------------- ---------- Revenues: Products $14,018 $2,458 $18,002 $10,820 Services *10,402 2,984 *13,051 OR5,241 ------------- ------------ --------------- ---------- Total revenues 24,420 5,442 31,053 16,061 Cost of products sold and services: Products 4,543 1,818 6,924 8,052 Services 4,660 4,663 8,700 8,121 ------------- ------------ --------------- ---------- Total cost of products sold and services revenues: 9,203 6,481 15,624 16,173 ------------- ------------ --------------- ---------- Gross profit 15,217 (d1,039) OF15,429 ~~THE~~(112) ~~SECURITIES~~------------- ~~EXCHANGE~~------------ ~~ACT~~--------------- OF---------- ~~1934~~Operating expenses Selling, marketing, general and administrative 2,847 3,639 4,772 7,486 ------------- ------------ --------------- ---------- Operating income (loss) 12,370 (4,678) 10,657 (7,598) Financial income (expenses), net (353) (135) (316) (572) Other income (expense) 16 (10) 59 49 ------------- ------------ --------------- ---------- Income (loss) before taxes on income 12,033 (4,823) 10,400 (8,121) Taxes (benefit) on income 2,449 (205) 2,457 (352) ------------- ------------ --------------- ---------- Income (loss) after taxes (benefit) on income 9,584 (4,618) 7,943 (7,769) Loss from discontinuing operations -- (509) -- (1,439) ------------- ------------ --------------- ---------- Net income (loss) $9,584 $(5,127) $7,943 $(9,208) ============= ============ =============== ========== Basic and diluted income (loss) per common share: from continuing operations $0.09 $(0.05) $0.08 $(0.07) from discontinued operations -- $(0.00) -- $(0.01) ------------- ------------ --------------- ---------- Net income (loss) per common share $0.09 $(0.05) $0. 08 $(0.08) ============= ============ =============== ========== Weighted average number of shares outstanding used in computing 104,530 106,906 104,530 106,906 basic net income (loss) per share: ============= ============ =============== ========== Weighted average number of shares outstanding used in computing 105,176 106,906 104,934 106,906 diluted net income (loss) per share ============= ============ =============== ========== * Including revenues from related parties in the amount of $6,741 for the six and three months ended June 30, 2003. The accompanying notes are an integral part of the condensed consolidated financial statements.

~~FOR~~RSTAR ~~THE~~CORPORATION ~~QUARTERLY~~AND ~~PERIOD~~ITS SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (U.S. dollars in thousands) SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, 2003 2002 ---------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 7,943 $ (9,208) Less: income (loss) from discontinued operations -- (1,439) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation 1,914 3,251 Amortization of deferred stock compensation -- 140 Decrease (increase) in deferred income taxes, net 1,958 (110) (Increase) decrease in trade receivables (495) 650 Decrease (increase) in inventories 493 (266) Decrease in other accounts receivable and prepaid expenses 472 789 Increase in long-term receivables (13,721) (5,669) (Decrease) increase in trade payables (666) 620 (Decrease) in deferred revenue (269) (639) (Decrease) increase in related parties (680) 1,987 Increase (decrease) in accrued expenses 312 (3,735) Increase in other accounts payable and other long-term liabilities 1240 2,409 ---------------- --------------- NET CASH USED IN OPERATING ACTIVITIES FROM CONTINUING ACTIVITIES (1,499) (8,342) NET CASH USED IN OPERATING ACTIVITIES FROM DISCONTINUED OPERATIONS -- (1,439) ---------------- --------------- NET CASH USED IN OPERATING ACTIVITIES (1,499) (9,781) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (919) (948) Proceeds from the sale of property and equipment -- 1,761 Restricted cash, net 549 977 ---------------- --------------- NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (370) 1,790 CASH FLOWS FROM FINANCING ACTIVITIES: Short term bank credit, net (1,446) (728) Repayment of long term debt (539) - Borrowing of long term debt - 2,632 Payments on capital lease obligations (520) (1,937) ---------------- --------------- NET CASH USED IN FINANCING ACTIVITIES (2505) (33) Effects of exchange rate changes on cash (26) 255 ---------------- --------------- Decrease in cash and cash equivalents (4,348) (7,769) Cash and cash equivalents at beginning of period 8,163 37,334 ---------------- --------------- Cash and cash equivalents at end of period $ 3,815 $ 29,565 ================ =============== Supplemental Disclosures Cash paid for interest $ 122 $ 308 ================ =============== The accompanying notes are an integral part of the condensed consolidated financial statements.

6 RSTAR CORPORATION AND ITS SUBSIDARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2003 NOTE 1: BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statement presentation. In addition, certain reclassifications have been made to the 2002 consolidated financial statements to conform to the 2003 presentation. rStar Corporation and its subsidiaries the ("Company"), in its opinion, has included all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the results of operations for the three and six months ended June 30, 2003 and 2002, respectively. The condensed consolidated financial statements and notes thereto should be read in conjunction with the audited financial statements and notes for the year ended December 31, 2002 included on Form 10K, as filed with the Securities and Exchange Commission on April 15, 2003. Operating results for the three and six months ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ended December 31, 2003. For further information, refer to the financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 000-27029). On August 2, 2002 (the "Closing"), the Company closed the previously announced StarBand Latin America acquisition and issued 43,103,448 shares of the Company's Common stock to Gilat-To-Home Latin America (Holland) N.V., an affiliate of Gilat Satellite Networks Ltd. ("Gilat") in exchange for the business of StarBand Latin America (Holland) B.V., and its subsidiaries. In accordance with the terms of the acquisition agreement between Gilat and rStar, while regulatory approvals required for the transfer of certain of the Latin American entities of StarBand Latin America were pending, rStar assumed all rights, obligations and liabilities with respect to the business conducted by those entities, as of the date of the Closing. As Gilat is the controlling shareholder of both rStar and StarBand Latin America from January 2001, the acquisition has been accounted for as a combination between entities under common control in accordance with Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141") and FASB Technical Bulletin 85-5 "Issues relating to accounting for business combinations" ("FTB 85-5") issue No. 2 relating to Stock Transactions between Companies under Common Control from the date Gilat had achieved such common control. As such no goodwill resulted from the transaction and historical amounts are presented in a manner similar to a pooling of interests. Accordingly, rStar's 2001 historical financial statements and rStar's 2002 historical quarterly financial statements until the date of the closing have been restated to include the consolidated financial position, results of operations, and cash flows of StarBand as of and for the year ended December 31, 2001 and for the quarters ended March 31, 2002 and June 30, 2002 since Gilat achieved common control over StarBand and rStar which was in January 2001. As part of the second amended and restated acquisition agreement Gilat granted rStar's stockholders the right to receive a certain cash distribution from rStar (the "Special Distribution"). In accordance with the Agreement, in the event that the the StarBand Latin America Business ("SLA Business"), as defined below, does not achieve certain net income targets agreed to by the parties during each of the one year periods ended June 30, 2003 and June 30, 2004, rStar stockholders of record as of June 30, 2003 or June 30, 2004 will be entitled to their pro rata share of a Special Distribution equal to either $ 2.5 million or $ 5.0 million in cash, depending upon SLA Business' net income. Specifically, (i) if the net income for the StarBand Latin America business for the period from July 1, 2002 through June 30, 2003 is less than or equal to $ 1.6 million, the Special Distribution shall be $ 5.0 million, (ii) if the net income for the StarBand Latin America business for the period from July 1, 2002 through June 30, 2003 is greater than $ 1.6 million and less than or equal to $ 2.5 million, the Special Distribution shall be $2.5 million, (iii) if the net income for the StarBand Latin America business for the period from July 1, 2002 through June 30, 2003 is greater than $ 2.5 million, the Special Distribution shall be zero, (iv) if the net income for the StarBand Latin America business for the period from July 1, 2003 through June 30, 2004 is less than or equal to $ 11.0 million, the Special Distribution shall be $ 5.0 million, (v) if the net income for the StarBand Latin America business for the period from July 1, 2003 through June 30, 2004 is greater than $ 11.0 million and less than or equal to $ 16.5 million, the Special Distribution shall be $ 2.5 million, and (vi) if the net income for the SLA Business for the period from July 1, 2003 through June 30, 2004 is greater than $ 16.5 million, the Special Distribution shall be zero. Gilat guarantees the payment of the Special Distribution. As for the year ended June 30, 2003, consolidated net income was approximately $3.1 million. No extraordinary items of gain or loss existed and no amortization of goodwill and other intangible assets existed. As the Net Applicable Income for the year ended June 30, 2003 was above $ 2.5 million, no provision was needed for the first distribution. Notwithstanding, rStar has provided in its financial statements a $ 5 million provision for the second distribution as of December 31, 2002 as management's current assessment is that it is probable that the special distribution will be paid in 2004. However, if rStar is successful in growing its business and increasing its net income during 2003 and 2004, the special distribution may not need to be paid in part or at all. According to the Certificate of Incorporation of rStar, the SLA Business means the business of (a) implementing, operating and marketing broadband Internet access services and voice services to consumers and small office and home office subscribers in Latin America; (b) providing in Latin America a bundled product with direct-to-home television services using a single satellite dish; and (c) providing in Latin 7 America such new technologies and products relating to the foregoing as Gilat Satellite Networks Ltd. may in the future develop or make available to StarBand Communications Inc., which shall be offered to the Corporation upon commercially reasonable terms via a two-way satellite-based network, together with the related assets, licenses, rights, management, employees experience and know-how, in each case, as conducted by the Corporation either directly or through one or more direct or indirect subsidiaries, including, without limitation, StarBand Latin America (Holland) B.V. ("SLA'). rStar's management has determined that the following operations are included in the SLA Business: (i) StarBand Latin America (Holland) B.V (ii) Gilat Colombia S.A. E.S.P (iii) Gilat To Home Peru S.A. (iv) Gilat To Home Brazil Holding Ltda. (v) Gilat To Home Brazil Ltda (vi) Gilat Florida Inc. and (vii) intercompany agreements to provide services in Latin America with Gilat or its subsidiaries . In addition, certain expenses were allocated from rStar to the SLA Business. See also Note 1 - Related parties transactions. The Applicable Net Income used in connection with the Special Distribution as stated above is defined as follows: Consolidated net income (excluding extraordinary items of gain or loss and before the amortization of goodwill and other intangible assets) generated during the preceding 12-month period, by the SLA Business (as defined above), in each case: as determined in accordance with generally accepted accounting principles in the United States of America as in effect from time to time consistently applied. RELATED PARTY TRANSACTIONS Related party debts are due to Gilat and various Gilat controlled entities. As of the closing of the acquisition, see Note 1, Gilat was not able to physically remove certain assets and liabilities, which were not part of the acquisition agreement, from subsidiaries prior to such subsidiaries being 100% transferred into StarBand. As such, SLA Business has recorded a related party debt equal to the net of assets and liabilities due back to Gilat. These amounts are expected to be eliminated either through payment with existing cash or upon collection of accounts receivables or liquidation of other assets which are due back to Gilat. Once the assets due back to Gilat have been exhausted as a method of financing the repayment of this related party debt. Prior to the closing of the acquisition of StarBand Latin America in August 2002, related party debts of approximately $9.0 million and $12.0 million, in 2001 and 2002, respectively were converted to equity by Gilat. Gilat is committed to convert the remaining $5.0 million of additional debt to equity. Gilat and its affiliates charged rStar and its subsidiaries for equipment, space segment, management services and related costs, totaling $3.3 million and $3.2 million for the three months ended June 30, 2003 and 2002, respectively. During the six months ended June 30, 2003 and 2002 such charges amounted to $ 4.6 million and $ 5.8million,respectively. Additionally the Company entered into the follow agreements with Gilat affiliates: Representative agreement signed between a Gilat affiliate and the Company, according to which, Gilat compensates the Company for services supplied to Gilat affiliates, which were required for Gilat to be award government bids in Colombia. For the services received beginning in August 2002, Gilat has paid a commission equal to 3.5% of the gross proceeds of the bids. The total amount recognized as service revenues for the 6 month ended June 30, 2003 was $2.2 million. Representative agreement signed between a Gilat affiliate and the Company, according to which, Gilat compensates the Company for services supplied to a Gilat affiliate, which were required for Gilat to be awarded a government bid in Brazil. For the services received beginning in November 2002, Gilat has paid a commission equal to 3.5% of the gross proceeds of the bid. The total amount recognized as service revenues for the 6 month ended June 30, 2003 was $0.9 million. Software license Agreement signed between a Gilat affiliate and the Company, according to which, the Company sold two copies of the licensed software to Gilat for subleasing to Gilat's Colombian subsidiaries. The total amount recognized for the 6 month ended June 30, 2003 was $0.6 million. Engineering, Procurement and Construction Management Agreements signed between two Gilat affiliates and a subsidiary of the Company on June 30, 2003, according to which the Company will provide services to the Gilat affiliates. Engineering, Procurement and Construction Management services relating to the implementation and operation of voice and data services for the execution of the Gilat government projects in Colombia. The contracts are for a total of $4.7 million. The total amount recognized for the 6 month ended June, 2003 was $3.4 million. Settlement agreement and general release signed between a Gilat affiliate and the Company in March 2003, according to which, Gilat reimbursed the Company for disputes that arose with regard to certain assets transferred by Gilat to the Company in the closing agreement which the Company had incurred unexpected expenses. The total amount reimbursed for 6 month ended June 30, 2003 was $1.7 million. 8 NOTE 2: MAJOR CUSTOMERS AND SUPPLIERS A significant portion of the Company's revenues comes from services provided for Gilat (see related party transactions) in relation to a small number of contracts with foreign governments in Latin America. Revenues from the government of Peru amounted to $ 5.6 million and $ 3.8 million in the three months ended June 30, 2003 and 2002, respectively. For the six months ended June 30, 2003 such revenues amounted to $ 9.3 million and $ 9.8 million, respectively. These services, much like the contracts awarded to Gilat are awarded on a bid-by-bid basis and, as such, are considered non-recurring. See Note 5 for details regarding major customers. Revenues from StarOne which consist of sales of equipment under long-term capital leases were$ 9.7 million and $-0- for the three months ended June 30, 2003 and 2002 respectively and $9.8 million and $0 for the six months ended June 30, 2003 and 2002, respectively. Revenues from Gilat affiliates amounted to $6.7 million and $-0- for the three months and six months ended June 30, 2003 and 2002 respectively. These services are in connection with contracts awarded to Gilat on a bid -by-bid basis and , as such are considered non-recurring. See Note 7 for details on related party transactions.. The Company depends on a limited number of suppliers, out of which the major one is Gilat, a related party, for the equipment it sells and for certain services. If such supplier fails to deliver the necessary equipment and services, the Company may be required to seek alternative sources of supply. A change in suppliers could result in installation delays, which could cause a possible loss of sales and, consequently, could adversely affect the Company's results of operations and cash position. See Note 7 for detail regarding related parties transactions. NOTE 3: CRITICAL ACCOUNTING POLICIES AND ESTIMATES a. General: The Company's discussion of results of operations and financial condition relies on its consolidated financial statements that are prepared based on certain critical accounting policies that require management to make judgments and estimates that are subject to varying degrees of uncertainty. The Company believes that investors need to be aware of these policies and how they impact its financial statements as a whole, as well as its related discussion and analysis presented herein. While the Company believes that these accounting policies are based on sound measurement criteria, actual future events can and often do result in outcomes that can be materially different from these estimates or forecasts. The accounting policies and related risks described in the Company's annual report on Form 10K as filed with the Securities and Exchange Commission on April 15, 2003 are those that depend most heavily on these judgments and estimates. As of June 30, 2003, there have been no material changes to any of the critical accounting policies contained therein. b. Impact of recently issued accounting standards: In November 2002, the EITF reached a consensus on Issue 00-21, addressing how to account for arrangements that involve the delivery or performance of multiple products, services, and/or rights to use assets. Revenue arrangements with multiple deliverables are divided into separate units of accounting if the deliverables in the arrangement meet the following criteria: (1) the delivered item has value to the customer on a standalone basis; (2) there is objective and reliable evidence of the fair value of undelivered items; and (3) delivery of any undelivered item is probable. Arrangement consideration should be allocated among the separate units of accounting based on their relative fair values, with the amount allocated to the delivered item being limited to the amount that is not contingent on the delivery of additional items or meeting other specified performance conditions. The final consensus will be applicable to agreements entered into in fiscal periods beginning after June 15, 2003 with early adoption permitted. The provisions of this Consensus are not expected to have a significant effect on the Company's financial position or operating results. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The Company does not expect the adoption of SFAS No. 149 to have a material impact on its results of operations or financial position. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 requires that certain financial instruments, which under previous guidance were accounted for as equity, must now be accounted for as liabilities. The financial instruments affected include mandatory redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003 and must be applied to the Company's existing financial instruments effective July 1, 2003, the beginning of the first fiscal period after June 15, 2003. The adoption of this statement is not expected to have a material effect on the Company's financial position, results of operation or cash flows. 9 NOTE 4: SHAREHOLDERS' EQUITY a. Stock options plans: The following table summarizes information about stock options outstanding as of June 30, 2003:

ORWEIGHTED NUMBER OF AVERAGE OPTIONS EXERCISE PRICE ------------------ ------------------ Outstanding at December 31, 2002 2,086,788 $ 0.29 Forfeited (419,773) $ 0.15 ------------------ ------------------ Outstanding at June 30, 2003 (unaudited) 1,667,015 $ 0.32 ================== ================== b. Accounting for Stock-Based Compensation: The Company accounts for stock-based compensation in accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25") and FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation" ("FIN No. 44") in accounting for its employee stock options. Under APB No. 25, when the exercise price of an employee's options equals or is higher than the market price of the underlying Common Stock on the date of grant, no compensation expense is recognized. Under Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), pro-forma information regarding net income (loss) and income (loss) per share is required, and has been determined as if the Company had accounted for its employee stock options under the fair value method of SFAS No. 123. The fair value of these options is amortized over their vesting period and estimated at the date of grant using a Black-Scholes multiple option pricing model with the following weighted average assumptions: risk-free interest rates of 3% for each of 2003 and 2002; a dividend yield of 0.0% for each of those years; a volatility factor of the expected market price of the Common Stock of 0.82 and 0.42 for 2003 and 2002, respectively; and a weighted-average expected life of the option of 3.5 years for each of 2003 and 2002. Using SFAS No. 123 has no material effect on any of the periods presented. NOTE 5:-CUSTOMERS AND GEOGRAPHIC INFORMATION The Group operates in one business segment - the marketing and providing of services for very small aperture terminal ("VSAT") satellite earth stations. See Note 1 for a brief description of the Company's business. The Group has adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS No. 131"). a. Revenues by geographic area: Following is a summary of revenues by geographic area. Revenues are attributed to geographic area, based on the location of the end customers, as follows: IN THOUSANDS THREE MONTHS SIX MONTHS ENDED JUNE 30 ENDED JUNE 30 ------------------------------------------------------------ 2003 2002 2003 2002 -------------------------------- ----------- ------------ Peru $7,322 4,436 $12,729 $12,070 Colombia 745 791 1,891 1,266 Brazil 9,612 215 9,692 2,725 Intercompany 6,741 - 6,741 - -------------------------------- ----------- ------------ $24,420 $5,442 $31,053 $16,061 ================================ =========== ============

10 b. Revenues from single customers, which exceed 10% of total revenues in the reported years, as a percentage of total revenue:

oIN ~~TRANSITION~~THOUSANDS ~~REPORT~~THREE ~~PURSUANT~~MONTHS TOSIX ~~SECTION~~MONTHS 13ENDED ORJUNE ~~15(d)~~30 OFENDED ~~THE~~JUNE ~~SECURITIES~~30 ~~EXCHANGE~~------------------------------------------------------------- ~~ACT~~2003 OF2002 ~~1934~~2003 2002 -------------------------------- ----------- ------------ Gilat affiliates $6,751 $- $6,751 $- StarOne S.A. 9,693 - 9,773 - Government of Peru 5,265 3,772 9,344, 9,826 -------------------------------- ----------- ------------ $21,909 $3,772 $26,068 $9,826 ================================ =========== ============ c. The Group's long-lived assets are located in the following countries: IN THOUSANDS JUNE 30, DECEMBER 31, 2003 2002 ------------------ ----------------- Peru $6,247 $6,918 Colombia 3,361 3,341 Brazil 204 79 United States 4,650 5,335 ------------------ ----------------- $14,462 $15,673 ================== =================

11 NOTE 6: NET INCOME (LOSS) PER SHARE Basic loss per share is computed based on the weighted average number of ordinary shares outstanding during each period. Diluted loss per share is computed based on the weighted average number of ordinary shares outstanding during each period, plus dilutive potential ordinary shares considered outstanding during the period, in accordance with SFAS No. 128, "Earnings per Share". The following table presents the calculation of unaudited basic and diluted earnings per share (in thousands, except per share amounts): For the three and six months ended June 30, 2002, we have excluded all convertible preferred stock, warrants to purchase common and preferred convertible stock, outstanding stock options and stock subject to repurchase from the calculation of diluted net loss per common share because all such securities are anti-dilutive. For the three and six months ended June 30, 2003 we have excluded all convertible preferred stock, warrants to purchase common and preferred convertible stock. We have included 1,667,015 stock options that were outstanding and exercisable with an average exercise price of $0.32.

~~For~~IN ~~The~~THOUSANDS ~~Transition~~THREE ~~Period From To~~ MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2003 2002 2003 2002 -------------- ----------- ------------ ----------- Net income (loss) as reported $9,584 $(5,127) $7,943 $(9,208) Earnings (losses) per share: Basic $0.09 $(0.045) $0.08 $(0.07) Diluted $0.09 $(0.045) $0.08 $(0.07) Net income from continuing operations $9,584 $(4,618) $7,943 $(7,769) Earnings (losses) per share from continuing operations: Basic $0.09 $(0.045) $0.08 $(0.07) Diluted $0.09 $(0.045) $0.08 $(0.07) Net Loss from discontinued operations - (509) - (1439) Losses per share from discontinued operations Basic $0.00 $0.00 $0.00 $(0.01) Diluted $0.00 $0.00 $0.00 $(0.01) Weighted average number of shares of Common Stock outstanding during the period used to compute basic net earnings per share 104,530 106,906 104,934 106,906 Incremental shares attributable to exercise of outstanding options 646 - 404 - Weighted average number of shares of Common Stock outstanding during the period used to compute diluted net earnings per share 105,176 106,906 104,530 106,906 -------------- ----------- ------------ -----------

12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY STATEMENT CERTAIN MATTERS DISCUSSED IN THIS DOCUMENT MAY CONSTITUTE FORWARD-LOOKING STATEMENTS UNDER SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED (THE SECURITIES ACT), AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE EXCHANGE ACT). SUCH MATTERS ARE GENERALLY PRECEDED BY, FOLLOWED BY OR INCLUDE WORDS SUCH AS "ANTICIPATE," "BELIEVE," "PLAN," "ESTIMATE," "SEEK," AND "INTEND," AND WORDS OF SIMILAR IMPORT. THESE STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ARE SUBJECT TO BUSINESS AND ECONOMIC RISKS AND UNCERTAINTIES, WHICH ARE DIFFICULT TO PREDICT. THEREFORE, OUR ACTUAL RESULTS OF OPERATION MAY DIFFER MATERIALLY FROM THOSE EXPRESSED OR FORECASTED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF A NUMBER OF FACTORS, INCLUDING, BUT NOT LIMITED TO: o OUR SUCCESS IN BEING AWARDED SUBSTANTIAL PROJECTS FOR THE PROVISION OF OUR SERVICES AS DETAILED HEREIN; o THE WILLINGNESS OF END USERS FOR INTERNET ACCESS AND TRAFFIC TO PAY A PREMIUM FOR THESE SERVICES AND THE EXTENT OF REVENUES WE ARE ABLE TO GENERATE FROM PROVIDING THESE SERVICES; o THE WILLINGNESS OF END USERS TO PAY A FEE FOR BROADBAND INTERNET ACCESS, INDUSTRY-SPECIFIC CONTENT AND OTHER BUNDLED PRODUCTS AND SERVICES; o THE AVAILABILITY OF CASH RESOURCES AND FINANCING FACILITIES IN AMOUNTS ADEQUATE TO MEET OUR EXPECTED WORKING CAPITAL AND CAPITAL REQUIREMENTS FOR THE NEXT 12 MONTHS BASED ON OUR CURRENT BUSINESS PLAN; AND o INTEGRATION OF THE STARBAND LATIN AMERICAN BUSINESS, AMONG OTHER RISKS. IN ADDITION, A MORE COMPLETE DISCUSSION OF THE RISKS AND UNCERTAINTIES WHICH AFFECT OUR BUSINESS IS SET FORTH BELOW UNDER THE HEADING "FACTORS AFFECTING OUR BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION." ALL FORWARD-LOOKING STATEMENTS MADE BY US ARE QUALIFIED BY AND SHOULD BE READ IN CONJUNCTION WITH SUCH RISK DISCLOSURE. WE UNDERTAKE NO OBLIGATION TO PUBLICLY UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE. OVERVIEW Following the closing of the acquisition of StarBand Latin America on August 2, 2002, the Company has committed a significant portion of its resources and technical expertise to the Latin American market for voice and data services. As such, through our acquired subsidiaries, we install, operate and maintain satellite-based rural telephony networks in certain Latin American countries, as well as high-speed consumer Internet access pilot networks in certain other countries. We work on a wholesale basis with Latin American ISP's, PTTs, government entities and other providers to offer high-speed Internet access and telephony services via satellite. Our end-user target customers for our products and services are small office/home office ("Soho") customers and consumer customers in Latin America. At the time of the closing of the StarBand Latin America Acquisition, the legal transfer of some of the Latin American entities to be transferred to us was pending government regulatory approvals. Pursuant to a closing agreement entered into by rStar and Gilat at the closing of the acquisition, , Gilat transferred to rStar the parent company of such entities in August of 2003. rStar obtained all rights, obligations and liabilities with respect to the businesses conducted by the entities as of August 2, 2002. Under the acquisition agreement, StarBand Latin America entered into a master services and supply agreement with Gilat pursuant to which we received specified services and products from Gilat necessary to conduct our business in Latin America. See "Master Service and Supply Agreement" incorporated by reference. From September 1997 through October 2000 our principal focus was building and operating an advertiser-supported network serving the education market. Due to changes in our business focus, we discontinued this business and concentrated our efforts toward becoming a provider of satellite-based services to vertical markets. Management has discontinued this business as well in order to focus solely on providing satellite connectivity in Latin America. In connection with our change in business focus, we had undergone significant reductions-in-force during 2001 and 2002. These actions, combined with attrition, reduced our headcount approximately 85% from 120 employees at December 31, 2001 to 18 employees as of June 30, 2002. In connection with the StarBand Latin America acquisition, the employment of remaining employees was terminated, including the then current CEO and the CFO during the third quarter ended September 30, 2002. Total severance costs associated with these actions equaled approximately $735,000 for the twelve months of 2001, and approximately $2.2 million for the twelve months ended December 31, 2002. These costs have been charged to operations. Also in connection with the StarBand Latin America acquisition, we obtained through subsidiary companies of StarBand Latin America approximately 115 employees, most of whom are located in Latin America and have increase our head count to approximately 200 employees as of July 31,2003. In addition, Gilat has provided headquarters 13 personnel during the transition period. It is anticipated that we will increase our headcount in the near term to match the demand in the market. BASIS OF PRESENTATION As Gilat is the controlling shareholder of both rStar and StarBand Latin America, the acquisition has been accounted for as a combination between entities under common control in accordance with SFAS No. 141. As such, no goodwill has resulted from the transaction and historical amounts are presented much like in a pooling of interests. Common control of the entities began on January 1, 2001. Accordingly, rStar's historical financial statements have been restated to include the consolidated financial position, results of operations, and cash flows of StarBand Latin America from January 1, 2001 to the present. Therefore the discussions below include both the activities of rStar and those of StarBand Latin America. CRITICAL ACCOUNTING POLICIES In December 2001, the SEC requested that all registrants discuss their "critical accounting policies." A critical accounting policy is a policy that is both important to the portrayal of our financial condition and results and requires subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We believe the following accounting policies to be critical: Use of estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Revenue Recognition: We recognize revenues from product sales when shipment has occurred, persuasive evidence of an arrangement exists, the vendor's fee is fixed or determinable, no future obligations exist and collection is probable. We do not grant rights of return. Determination of the probability of collection is based on the financial position and the history with the customers, and on management's assessment of the probability of the payment of fees for services rendered and products delivered. Should changes in conditions cause management to determine that these criteria are not met for certain future transactions, revenue recognized for any reporting period could be adversely affected. Service revenues are recognized ratably over the contractual period or as services are performed. Where arrangements involve multiple elements, revenue is allocated to each element based on the relative fair value of the element when sold separately. Arrangements that include installation services are evaluated to determine whether those services are an integral component of the equipment used. When installation services are considered integral, revenue from products and services is recognized only upon installation. When services are not considered integral, revenues from product sales are recognized upon shipment and the service revenue is recognized when the services are performed. Revenues from products under sales-type-lease contracts are recognized in accordance with Statement of Financial Accounting Standard No. 13, "Accounting for Leases" ("SFAS No. 13") upon installation or upon shipment, in cases where the customer obtains its own or others installation services. The present values of payments due under sales-type-lease contracts are recorded as revenues at the time of shipment or installation, as appropriate. Future interest income is deferred and recognized over the related lease term as financial income. The net investments in sales-type-lease are discounted at the interest rates implicit in the leases. Cost of Revenues: Cost of revenues, for both products and services, includes the cost of system design, equipment, satellite capacity, and third party maintenance and installation. For equipment contracts, cost of revenues is expensed as revenues are recognized. For network service contracts, cost of revenues is expensed as revenues are recognized over the term of the contract. For maintenance contracts, cost of revenues is expensed as the maintenance cost is incurred or over the term of the contract. Accounts Receivable: We are required to estimate our ability to collect our trade receivables. A considerable amount of judgment is required in assessing their ultimate realization. We provided allowance for our receivables relating to customers that were specifically identified by our management as having difficulties paying their respective receivables. 14 Inventory: We are required to state our inventories at the lower of cost or market price. In assessing the ultimate realization of inventories, we are required to make judgments as to future demand requirements and compare that with the current or committed inventory levels. We have recorded significant changes in required reserves in recent periods due to changes in strategic direction, such as discontinuation of product lines and due to changes in market conditions such as altered demands for product specifications. Other Operating Data The following information for the three and six months ended June 30, 2003 and 2002 is provided for informational purposes and should be read in conjunction with the unaudited Consolidated Financial Statements and Notes provided herein and the Consolidated Financial Statements presented with the Company's annual Form 10-K for the year ended December 31, 2002. The following table sets forth certain operating data and the percentage increase or decrease from the prior period:

~~Commission~~IN ~~File~~THOUSANDS ~~Number~~SIX MONTHS INCREASE THREE MONTHS ENDED ENDED JUNE 30, JUNE 30, INCREASE UNAUDITED (DECREASE) UNAUDITED (DECREASE) 2003 2002 PERCENTAGE 2003 2002 PERCENTAGE Revenues: Products $18,002 $10,820 66% $14,018 $2,458 470% Services *13,051 5,241 149% *10,402 2,984 249% ---------------------------------------------------------------------------------- Total revenues 31,053 16,061 93% 24,420 5,442 349% Cost of revenues: Products 6,924 8,052 (14)% 4,543 1,818 150% Services 8,700 8,121 7% 4,660 4,663 0% -~~27029~~--------------------------------------------------------------------------------- Total cost of revenues: 15,624 16,173 (7%) 9,203 6,481 37% Gross profit (loss) 15,429 112 13553% 15,217 (1,039) 1364% ---------------------------------------------------------------------------------- Operating Expenses Selling, marketing, general and administrative 4,772 7,486 (37%) 2,847 3,639 (99%) ---------------------------------------------------------------------------------- Operating income (loss) 10,657 (7,598) 240% 12,370 (4,678) (364%) Financial income (expenses), net (316) (572) 45% (353) (135) (161%) Other(income) loss 59 49 220% 16 10 60% ---------------------------------------------------------------------------------- Income (loss) before taxes on income 10,400 (8,121) (228%) 12,033 (4,823) 350% Taxes(benefit) on income 2,457 (352) 798% 2,449 (205) (1295)% ---------------------------------------------------------------------------------- Income (loss) after taxes on income 7,943 (7,769) 202% 9,584 (4,618) 308% Loss from discontinuing operations - (1,439) 100% - (509) 100% ---------------------------------------------------------------------------------- Net income (loss) $7,943 $(9,208) 186% $ 9,584 $(5,127) 287% ================================================================================== Basic and diluted income (loss) per common share: from continuing operations $0.08 $(0.07) 214% $0.09 $ (0.04) 325% from discontinued operations - (0.01) 100% - (0.00) ---------------------------------------------------------------------------------- Net income (loss) per common share $0.08 $(0.08) 200% $0.09 (0.04) 325% Weighted average number of shares outstanding used in computing basic and diluted net income (loss) per share 104,934 106,906 (2)% 105,176 106,906 (2)% ==================================================================================

* Including revenues from related parties in the amount of $6,741 for the six and three months ended June 30, 2003. RESULTS OF OPERATIONS We believe that, due to the change in business scope, the discontinued operations and the changing climate of business in Latin America, period-to-period comparisons of our operating results are not meaningful and should not be relied upon as predictive of future performance. Our prospects must be considered in light of the risk, expenses and difficulties frequently encountered by companies in the early stage of development, particularly companies in new and rapidly evolving markets. We may not be successful in addressing such risks and difficulties. 15 REVENUES The majority of our revenues are from the installation and implementation of rural telephony and Internet networks in Latin America. Revenue is recognized from the sale of equipment, installation of that equipment, and for services performed from the networks such a telephony and Internet. We classify our revenues as either product revenues or service revenues. Product revenues are derived from the sale and installation of equipment. When sales require installation, revenues are recognized as the products are installed and are considered non-recurring revenue on a per project basis. Sales not requiring installation are recognized as products are shipped and title passes to the customer. Service revenues are derived from maintenance contracts for the network, and services performed from the network such as telephony and Internet services. Service revenues related to the maintenance contracts and to services performed from traffic generated through the networks are recurring in nature throughout the life of the contract. A significant portion of revenue comes from foreign governments. These contracts are won on a bid-by-bid basis and, as such, each bid is considered non-recurring. For the six months ended June 30, 2003, we were not awarded any new projects, however Gilat has been awarded certain projects in Latin America in 2002 and 2003 and we will be providing certain services under such contracts ( See related party footnote 7 of the financial statements for a description of those services. As such, we expect that our recurring revenue will increase in the near future. PRODUCTS Revenues from product sales and installations increased $11.6 million (470%) from $2.5million for the three months ended June 30, 2002 to $14.0 million for the three months ended June 30, 2003. This increase in revenue was attributable mainly to the sale of equipment totaling $9.6 million to StarOne in Brazil under long-term capital leases and the completion of the implementation phase of the Peru projects during the three months ended June 30, 2003. We anticipate additional sales to StarOne in 2003, however since we did not record any revenue from new bids in 2003, we do not anticipate any additional significant product revenue from new bids in 2003. Revenues from product sales and installations increased $7.2 million (66%) from $10.8 million for the six months ended June 30, 2002 to $18.0 million for the six months ended June 30, 2003. This increase in revenue was attributable mainly to the sale of equipment totaling $9.6 million to StarOne in Brazil under long-term capital leases and the completion of the implementation phase of the Peru projects during the six months ended June 30, 2003. Excluding the StarOne sale, product and installation revenues decreased as product sales and installations typically are higher during the beginning of project implementation. As the Peru implementation was completed during the six months ended June 30, 2003 we expect such revenue to decline in the near future. We did not record any revenue from new bids in 2003, therefore there was a corresponding reduction in the amount of product revenues excluding the StarOne sale during the six months ended June 30,2003. SERVICES Revenues from services increased $7.5million (249%) from $3.0 million for the three months ended June 30, 2002 to $10.5 million for the three months ended June 30, 2003. This increase was attributable primarily to representative agreements for the acquisition of the Gilat bids and the Engineering, Procurement and Construction Management Agreements, for design and management services provided to Gilat affiliates in connection with bids Gilat won in 2002 and 2003 in Colombia and Brazil with the respective governments. These services provided to Gilat and affiliates were $6.9 million during the three months ended June 30, 2003. Additionally service revenue for the implementation of the bids won by the Company in 2001, which were implemented in 2002 and completed in 2003 increased from $2.9 million for the three months ended June 30, 2002 to $3.6 million for the three months ended June 30, 2003. It is anticipated that this revenue will continue to increase as the network matures and reflecting the additional installations completed in Peru during the three months ended June 30, 2003. Revenues from services increased $7.8million (149%) from $5.2million for the six months ended June 30, 2002 to $13.1 million for the six months ended June 30, 2003. Excluding the services provided to Gilat and affiliates of $6.9 million discussed above, the $1.0 million dollar increase for the six months ended June 30, 2003 is attributable primarily to the implementation of the bids won in 2001, which were implemented in 2002 and completed during the six months ended June 30, 2003. . COST OF REVENUES Cost of revenues related to products consists of the cost of equipment for the government projects noted above and third parties. Equipment sales, within each specific project, are non-recurring in nature. We anticipate that upon maturation of the various networks that compose our continuing operations, cost of revenue related to services will consist primarily of the depreciation on network equipment, the cost of administering our satellite communications network, and the cost of procuring and providing space segment necessary to provide such services, installing satellite signal-receiving equipment at customer sites mainly. The costs associated with this type of telecommunications business generally include (1) the cost of land-based equipment, or earth segment, such as the satellite dishes, hubs, send/receive cards located inside the network servers; (2) the cost of the link to and from the satellite, or space segment; and (3) interconnection fees with local providers. 16 PRODUCTS For the three months ended June 30, 2003, cost of revenues related to products increased $2.7million (150%) from $1.8 million for the three months ended June 30, 2002 to $4.6 million for the three months ended June 30, 2003. This increase was attributable to an increase in product sales revenue in 2003. The margin on product sales for the three months ended June 30, 2003 is substantially higher then the three months ended June 30, 2002 as third party product sales margins are generally higher than governmental product sales which generally require installation and future servicing of the network. For the six months ended June 30, 2003, cost of revenues related to products decreased $1.4million (18%) from $8.1million for the six months ended June 30, 2002 to $6.6 million for the six months ended June 30, 2003. This decrease is primarily attribute to the decrease in product sale in the three months ended March 31, 2003 compared to the product sale for the three months ended March 31, 2002. SERVICES For the three months ended June 30, 2003, cost of revenues from services remained the same at $4.7million for the three months ended June 30, 2002 and for the three months ended June 30, 2003. The cost of service remained similar to the prior quarter as we have taken measures to reduce costs while increasing the number of installations and units serviced and the cost of providing services to Gilat. Other than installation services, cost of revenues consisted primarily of operational expenses for our existing networks in Colombia and Peru. For the six months ended June 30, 2003, cost of revenues from services decreased $1.1 (114%) from $8.1million for the six months ended June 30, 2002 to $6.9 million for the six months ended June 30, 2003. The increase was attributable to the increased traffic on the networks we service and increase maintenance costs related to the operation of the networks and the cost of providing services to Gilat offset by cost reductions. Other than installation services, cost of revenues consisted primarily of operational expenses for our existing networks in Colombia and Peru. SELLING, MARKETING, GENERAL AND ADMINISTRATIVE Selling, marketing, general and administrative expenses represent the costs of personnel and overhead associated with our efforts to obtain contracts and new business in Latin America with Internet Service Providers (ISP's), PTTs, government entities and other providers to offer high-speed Internet access and telephony services via satellite. Selling, marketing, general and administrative expenses for continuing operations for the three months ended June, 2003 and 2002 were approximately $2.8 and $3.6, respectively. The decrease of $ (22.1%) was attributable to selling and marketing efforts associated with project awards in Peru and Colombia during the prior year and as such resulted in higher than normal management fees charged by a Gilat affiliate for such sales and marketing assistance. In addition, the decrease in this expense is attributable to professional and consulting costs relating to the StarBand Latin America acquisition, which were incurred in the prior year quarter totaled approximately $400,000and the cost of the rStar employees that were terminated after the acquisition in August of 2002. During the six months ended June 30, 2003, Selling, marketing, general and administrative decreased $2.7 (37%) . The six months ended June 30, 2002 included the cost of the rStar employees that were terminated after the acquisition when we reduced our headcount approximately 85% from 120 employees at December 31, 2001 to 18 employees as of June 30, 2002. FINANCIAL EXPENSES, NET Financial expenses include interest income, interest expenses and foreign currency gains and losses. Financial expense was $353,000 and $135,000 during the three months ended June 30, 2003 and 2002 respectively. The increase was the result are of a combination of diminishing cash balances available for investment at lower interest rates partially offset by a reduction in interest expenses relating to the expiration of significant capital lease obligation during 2002 and a conversion of debt to equity with a related party lease, Spacenet Inc., a wholly owned subsidiary of Gilat. Financial expense was $316,000 and $572,000 during the six months ended June 30, 2003 and 2002 respectively. The decrease was the result of foreign exchange losses in Brazil and Colombia in 2002. offset by and diminishing cash balances available for investment at lower interest rates and a reduction in interest expenses relating to the expiration of significant capital lease obligation during 2002 and a conversion of debt to equity with a related party lease, Spacenet Inc., a wholly owned subsidiary of Gilat. LOSS FROM DISCONTINUED OPERATIONS We discontinued all operational components of rStar, which was mainly the AutoNetworks business in 2002, As of December 2002, there were no further costs incurred for discontinued operations. For the three months ended June 30, 2002, approximately $509,000 of costs were incurred relating the AutoNetworks business. For the six months ended June 30, 2002 approximately 1.4 million of costs were incurred relating to the AutoNetworks business. 17 LIQUIDITY AND CAPITAL RESOURCES OPERATING ACTIVITIES. For the six months ended June 30, 2003, net cash used in operating activities was approximately $1.5 million consisting of approximately $7.9million of net income increased by non-cash charges of approximately $1.9 million relating to depreciation. In addition, trade receivables increased by approximately $495,000 , and other receivables and prepaid expenses (including long-term receivables) increased by approximately $ 13.2 million. This overall increase was attributable to revenue recorded from our projects in Peru and from the long-term capital lease with StarOne. In addition, we reduced our debt with Gilat by $680,000. Decreasing our inventory by approximately $493,000 offset these uses of cash. This compares to cash used in the prior years six months ended of approximately $8.3million. Prior years cash was primarily used in net losses generated by the Company. INVESTING ACTIVITIES. During the six months ended June 30, 2003, we spent approximately $370,000 on investing activities, which was attributable to $919,000 in fixed asset purchases net of a reduction in restricted cash from our various activities in Peru of approximately $549,000. FINANCING ACTIVITIES. During the six months ended June 30, 2003 we spent approximately $ 2.5 million in financing activities, which was primarily attributable to repayments of debt and capital leases. In connection with the acquisition of StarBand Latin America, we have committed to pay a special distribution to our minority shareholders under certain circumstances. In accordance with the acquisition agreement and our certificate of incorporation, in the event that the StarBand Latin America business, as defined, does not achieve certain net income targets agreed to by the parties during each of the one year periods ended June 30, 2003 and June 30, 2004, rStar stockholders of record as of June 30, 2003 or June 30, 2004 (other than Gilat and its affiliates which agreed to waive receipt of such amounts) will be entitled to their pro rata share of a special distribution equal to either $2.5 million or $5.0 million in cash, depending upon the net income. Specifically, if the net income for the StarBand Latin America business for the period from July 1, 2002 through June 30, 2003 is less than or equal to $1.6 million, the special distribution shall be $5.0 million and if the net income for the StarBand Latin America business for the period from July 1, 2002 through June 30, 2003 is greater than $1.6 million and less than or equal to $2.5 million, the special distribution shall be $2.5 million. If the net income for the StarBand Latin America business for the period from July 1, 2002 through June 30, 2003 is greater than $2.5 million, then no payment shall be due. If the net income for the StarBand Latin America business for the period from July 1, 2003 through June 30, 2004 is less than or equal to $11.0 million, the special distribution shall be $5.0 million and if the net income for the StarBand Latin America business for the period from July 1, 2003 through June 30, 2004 is greater than $11.0 million and less than or equal to $16.5 million, the special distribution shall be $2.5 million. If the net income for the StarBand Latin America business for the period from July 1, 2003 through June 30, 2004 is greater than $16.5 million, there shall be no special distribution. In connection with the acquisition of StarBand Latin America, Gilat agreed to guarantee the payment of this special distribution. The net applicable income for the StarBand Latin America business for the period from July 1, 2002 through June 30, 2003 was greater than $2.5 million, therefore no payment was due for this period. However we have recorded a provision of $5.0 million regarding distribution of special distribution to the minority shareholders in year ending June 30,2004. It is management's current assessment that it is probable that the special distribution will be paid in 2004. However, if the Company is successful in growing its business and increasing its net income during the period July 1 2003 to June 30, 2004, the special distribution may not need to be paid. In the event we have to pay such a dividend it would have a significant impact on our cash reserves. We anticipate that if we collect our receivables and if we reach our targets as we have projected then our available cash resources will be sufficient to meet our expected working capital and capital expenditure requirements for the next 12 months, however this anticipates that we do not make any significant payments to Gilat. The acquisition of StarBand Latin America, however, results in the addition of a substantial new business to the Company and new management. The financial requirements of that business may vary significantly based on a number of factors, including, the speed with which service is expanded, the impact that competitive offerings have on market prices and terms, the ability of the Company to forecast its expenses and the terms it receives from its vendors (See "Factors Affecting our Business, Operating Results and Financial Condition"). Consequently, we may seek to raise additional funds. Additionally, we may require additional capital to develop new satellite-based private networks, respond to competitive pressures, acquire complementary technologies, or respond to unanticipated developments. We may seek to raise additional funds through private or public sales of securities, strategic financial and business relationships, bank debt, lease financing, or otherwise. If additional funds are raised through the issuance of equity securities, the percentage of the Company owned by existing stockholders will be reduced, stockholders may experience additional dilution, and these equity securities may have rights, preferences, or privileges senior to those of the holders of our common stock. Additional financing may not be available on acceptable terms, if at all. If adequate funds are not available or are not available on acceptable terms, we may be unable to deploy or enhance our networks, develop the business acquired in the StarBand Latin America acquisition, take advantage of future opportunities, or respond to competitive pressures or unanticipated developments, which could severely harm our business. 18 As of June 30, 2003, our short and long term obligations were as follows:

~~RSTAR~~PAYMENTS ~~CORPORATION~~DUE BY PERIOD (IN THOUSANDS) CONTRACTUAL OBLIGATIONS TOTAL 2003 2004-2006 2007 AND BEYOND Capital Lease Obligations $4,104 $1,447 $2,657 -- Operating lease $492 $57 $386 $49 Other long-term obligations $11,431 $1,647 $9,784 -- Related party obligation $20,811 $20,811 -- -- ---------------------------------------------------- Total Contractual Cash Obligations $36,838 $23,962 $12,827 $49 ====================================================

OFF BALANCE SHEET ARRANGEMENTS At June 30 2003, The Company is required to provide guarantees of performance of our work to our customers (usually government entities). Such guarantees are generally provide by Gilat on our behalf. The guarantees are required by contract for our performance during the installation and operational period of long-term rural telephony projects in Latin America. The guarantees for installation typically expire soon after certain milestones are met and guarantees for operations typically expire proportionally over the contract period. Our maximum potential amount of future payments the subsidiaries could be required to make under its guarantees at June 30, 2003 is $30.8 million. We have not recorded any liability for such amounts, as we do not expect that our performance will be unacceptable. 19 FACTORS AFFECTING OUR BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION RISKS RELATING TO OUR BUSINESS. WE HAVE AN UNPROVEN BUSINESS MODEL AND WE MAY NOT REALIZE ANY BENEFITS FROM THE STARBAND LATIN AMERICA ACQUISITION. Achieving the benefits of the StarBand Latin America acquisition will depend, in part, on our ability to integrate the StarBand Latin America business, technology, operations and personnel into our operations. The integration of StarBand Latin America will be a complex, time consuming and expensive process and may disrupt our business if not completed in a timely and efficient manner. Among other challenges involved in this integration are (i) obtaining the regulatory approvals required to transfer certain Latin American operations from Gilat to us, (ii) ensuring that Gilat provides us with the economic benefit of such operations until such time as the regulatory approvals have been obtained; (iii) retaining key personnel and addressing any adverse changes in business focus; and (iv) maintaining the necessary cash and other resources to meet our expected working capital and capital expenditure requirements, including the cash that we may have to pay our stockholders pursuant to the special cash distribution. We do not have experience in integrating operations on the scale represented by the acquisition, and it is not certain that we will be able to successfully integrate StarBand Latin America into our operations in a timely manner or at all, or that any of the anticipated benefits of the acquisition will be realized. Failure to do so could seriously harm our business, financial condition and operating results. A stockholder must carefully consider the risks and difficulties frequently encountered by companies in an early stage of development, as well as the risks we face due to our participation in a new and rapidly evolving market. Our business strategy may not be successful and it may not successfully overcome these risks. WE HAVE INCURRED SUBSTANTIAL LOSSES AND ANTICIPATE CONTINUED LOSSES. We incurred net losses of approximately $209 million from our inception through June 30, 2003, which losses resulted primarily from costs related to developing our discontinued education network business, deploying the network to schools and developing content and features for the network. We have also had significant losses in our operation in Latin America and only recently achieved profitability and even though we have achieve profitability, we may not sustain it on an annual basis. We expect to have negative cash flows for the foreseeable future. We will need to generate significant additional revenues to maintain profitability. We anticipate that a significant portion of these revenues will come from providing services to Gilat for the projects that it has won in Colombia and Brazil. It is possible that we may not sustain or increase profitability on a quarterly or annual basis in the future. If we do not sustain profitability in the future, then we may be unable to continue our operations. In the event that we do not achieve certain levels of net income for the periods ending June 2004, we will need to pay a special distribution in the form of a dividend to our minority shareholders. See Item 7: "Liquidity and Capital Resources" WE EXPECT OUR QUARTERLY FINANCIAL RESULTS TO FLUCTUATE, AND OUR RECENT SHIFT TO OUR CURRENT BUSINESS LIMITS MANAGEMENT'S ABILITY TO PREDICT REVENUES AND EXPENSES PRECISELY. Our quarterly and annual operating results have varied in the past and are likely to fluctuate significantly in the future due to a variety of factors, many of which are outside of our control. Factors that might cause quarterly fluctuations in our operating results include the factors described in the accompanying subheadings. To respond to these and other factors, we may need to make business decisions that could impact our quarterly operating results. Most of our expenses are relatively fixed in the short term. Moreover, our expense levels are based, in part, on our expectations regarding future revenue levels in connection with our current business. As a result, if total revenues for a particular quarter are below our expectations we may not be able to proportionately reduce our operating expenses for that quarter. This revenue shortfall might then have a disproportionate effect on our expected operating results for that quarter. In addition, during future periods our quarterly or annual operating results may fail to meet the expectations of securities analysts or investors. In this case the trading price of our common stock would likely decrease. GILAT CAN EXERCISE TOTAL CONTROL OVER US. GILAT'S MANAGEMENT IS CHANGE ON APRIL 15, 2003, AND WE CANNOT BE SURE TO WHAT EXTENT, IF AT ALL, THIS WILL AFFECT US. As of December 31, 2002, Gilat beneficially owned approximately 85% of our common stock. Therefore, Gilat is able to exercise total control over such matters as the election of our directors and other fundamental corporate transactions such as mergers, asset sales, transfer of operations and a sale of our company. Additionally, our Final Amended and Restated Certificate of Incorporation permits, as allowed by the Delaware General Corporation Law, Gilat to undertake certain actions without calling and holding a special meeting of stockholders and to call a special meeting of rStar stockholders at any time. Accordingly, the influence of our other stockholders will be limited, which may depress our stock price. Also, we cannot assure you that the interests of Gilat will not, from time to time, conflict with your interests as a 20 stockholder. On April 15, 2003, Gilat's shareholders elected a new board of directors, the majority of which have not served in the past as directors, officers or employees of Gilat. In addition, as of April 15, 2003 Gilat has a new CEO and President, Oren Most. Mr. Most also serves as our chairman of the board of directors . We cannot guarantee that the new officers and directors of Gilat will not implement changes in rStar's business going forward and, that if such change is implemented, it will not have a material adverse effect on our business going forward. WE MAY SUFFER FOREIGN EXCHANGE RATE LOSSES. Following the StarBand Latin America acquisition, a portion of our international revenues and expenses are denominated in local currency. Therefore, a weakening of other currencies compared to the U.S. dollar could make our products less competitive in foreign markets and could negatively affect our operating results and cash flows. We do not currently engage in currency hedging activities, although in some instances we will reserve the right to engage in such activities. We have not yet, but may in the future, experience significant foreign currency transaction losses, especially to the extent that we do not engage in currency hedging. THE SUCCESS OF OUR INTERNATIONAL OPERATIONS IS DEPENDENT ON MANY FACTORS BEYOND OUR CONTROL WHICH COULD ADVERSELY AFFECT OUR PROFITABILITY AND ABILITY TO OFFER OUR PRODUCTS AND SERVICES IN LATIN AMERICA. Due to the StarBand Latin America acquisition, we have increased our exposure to international laws and regulations. If we cannot comply with foreign laws and regulations, which are often complex and subject to variation and unexpected changes, we could incur unexpected costs, delays and potential litigation. For example, the governments of foreign countries might attempt to regulate our products and services or levy sales or other taxes relating to our activities. In addition, foreign countries may confiscate our products or impose tariffs, duties, price controls or other restrictions on foreign currencies or trade barriers, any of which could make it more difficult for us to conduct our business. In addition, our operations in Latin America are also subject other factors beyond our control, such as political and economic instability, including the current political instability throughout Latin America. Our expansion in foreign markets requires us to respond to rapid changes in market conditions in these countries. Our overall success as an international business will depend, in part, upon our ability to succeed in differing economic, social and political conditions. We may not continue to succeed in developing and implementing policies and strategies that are effective in each location where we do business due to the StarBand Latin America acquisition. WE HAVE LIMITED PREVIOUS EXPERIENCE IN THE LATIN AMERICAN MARKET AND OUR ABILITY TO BE SUCCESSFUL IN THAT MARKET IS UNCERTAIN. Through the StarBand Latin America acquisition, we have expanded our business operations into the delivery of satellite-based telephony and Internet access services in Latin America. We have limited previous experience in the Latin American market, and have limited meaningful historical financial and operational data upon which we can base projected revenues and planned operating expenses and upon which you may evaluate our prospects in Latin America. The Latin American satellite-based telephony and Internet access market is an untested market for us and the results of these operations are uncertain and unpredictable. As a company expanding its business in the satellite-based telephony and Internet access market in Latin America, we face risks relating to our ability to implement our business plan, including our ability to continue to develop and upgrade our technology, our ability to maintain and develop customer and supplier relationships, obtain key technology and the necessary governmental and regulatory approvals, consents and licenses. We may not adequately address these risks, and if we do not, we may not be able to implement our business plan as we intend. Our business model contemplates that we will generate revenues through wholesale sales to Latin American Internet Service Providers, DTH TV companies and other service providers. The revenues may not materialize if we fail to implement our strategy for attracting wholesale customers. You should consider our business and prospects in light of the heightened risks and unexpected expenses and problems we may face in an emerging market place. FAILURE TO MANAGE THE GROWTH OF OUR OPERATIONS COULD HARM OUR BUSINESS AND STRAIN OUR MANAGERIAL, OPERATIONAL AND FINANCIAL RESOURCES. Due to the StarBand Latin America acquisition, we have recently and significantly changed our business model and strategy. We anticipate that future expansion will be required to successfully implement our business strategy. We may not be able to implement management information and control systems in an efficient and timely manner, and our current or planned personnel, systems, procedures and controls may not be adequate to support our future operations. If we were unable to manage growth effectively, our business would suffer. To manage the expected growth of our operations and personnel, we will be required to: (1) improve existing and implement new operational, financial and management controls, reporting systems and procedures; (2) install new management information systems; and (3) train, motivate and manage our sales and marketing, engineering, technical and customer support employees. Our employees, outsourcing arrangements, systems, procedures and controls may be inadequate to support our future operations. In particular, due to the StarBand Latin America acquisition, we expect that demands on the network infrastructure and our technical support resources will increase rapidly as our customer base grows. We may therefore experience difficulties meeting a high demand for services in the future or encounter problems in dealing with the customs of various countries in Latin America. In order to meet this demand, we will need to hire, train and retain the appropriate personnel, as well as the third-party service providers we depend on for customer service, to manage our operations. We will also need to adapt our financial and management controls, billing and information systems, reporting 21 systems and operating systems. Our failure to manage growth and expansion effectively, or the failure by one of our service providers to adequately perform its services, could harm our ability to retain or grow our customer base which in turn would harm our business, financial condition and results of operations. WE RELY HEAVILY ON OUR KEY PARTNERS, WHO ARE RELATED PARTIES, AND IF THEY TERMINATE THEIR STRATEGIC ALLIANCES WITH US OR IF THE ARRANGEMENTS FAIL TO MEET OUR OBJECTIVES, WE MAY EXPERIENCE SIGNIFICANT DIFFICULTY AND OUR REVENUE GROWTH MAY SUFFER. We rely heavily on our strategic alliance relationships with Gilat and its wholly owned subsidiary, Spacenet. Our arrangements with Gilat and Spacenet are complex and, as a result, there entail many risks, including some that we may not have foreseen. It is difficult to assess the likelihood of occurrence of these risks, including the lack of success of the overall arrangements to meet the parties' objective or the financial condition of Gilat and its affiliates. For example, Gilat recently consummated a restructuring plan with some of its creditors. It is unclear whether this plan will affect our relationship with Gilat. If we fail to maintain these relationships, as anticipated, or if our partners do not perform to our expectations, the performance of our networks, and our ability to generate revenues, may be harmed. IF GILAT IS UNABLE TO PROVIDE US WITH THE LICENSES AND SERVICES WE REQUIRE, WE MAY BE UNABLE TO PROVIDE OUR SERVICES AND OUR BUSINESS WILL BE HARMED. We depend upon Gilat and its subsidiaries in Latin America and the United States to provide us with the services that are required to run our business and provide our services, especially due to the StarBand Latin American Acquisition. For example, we are not a licensee in the United States or in any Latin America country and do not hold any authorizations to operate satellite communication facilities. We will depend totally upon the licenses held by the subsidiaries of Gilat located in the United States and in Latin America for our products and services. If their licenses are limited or revoked, if any legal or regulatory restrictions are imposed on extending their services to us, or if the United States or any Latin American country limits the number of their earth stations or if they fail to operate the earth stations providing service to subscribers of our wholesale customers, in a satisfactory manner, our business could be seriously harmed. THE MARKET PRICE OF OUR COMMON STOCK MAY DECLINE AS A RESULT OF THE STARBAND LATIN AMERICA ACQUISITION. In connection with the StarBand Latin America acquisition, we issued new shares of our common stock to Gilat and certain of its subsidiaries, further diluting our results of operations on a per-share basis. This dilution could reduce the market price of our common stock unless and until we achieve revenue growth or cost savings and other business economies sufficient to offset the effect of the issuance of additional shares. Additionally, the market price of our common stock may decline as a result of the transactions if: o the integration of rStar and StarBand Latin America is unsuccessful; o we do not achieve the perceived benefits of the StarBand Latin America acquisition as rapidly or to the extent anticipated by financial or industry analysts or investors; or o the effect of the StarBand Latin America acquisition on our financial results is not consistent with the expectations of financial or industry analysts or investors. THE LOSS OF KEY PERSONNEL MAY HURT OUR ABILITY TO OPERATE OUR BUSINESS EFFECTIVELY. Our success depends, in part, upon the continued contributions of the principal members of our sales, engineering and management departments, many of whom perform important management functions and would be difficult to replace. The loss of the services of any key personnel could seriously harm our business. IF WE ARE UNABLE TO RETAIN AND HIRE ADDITIONAL QUALIFIED PERSONNEL AS NECESSARY, WE MAY NOT BE ABLE TO SUCCESSFULLY ACHIEVE OUR OBJECTIVES. Like all technology companies, we must compete for talented employees to develop our products, services, and solutions in a market where the demand for such individuals exceeds the number of qualified candidates. As a result, our human resources organization focuses significant efforts on attracting and retaining individuals in key technology positions. If we experience a substantial loss of, or an inability to attract, talented personnel, the resulting talent gap could affect our ability to meet our business objectives. WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT COULD BE DILUTIVE TO OUR STOCKHOLDERS AND RESULT IN INCREASED DEBT AND ASSUMPTION OF CONTINGENT LIABILITIES. As part of our business strategy, we may consider acquisition prospects that would complement our current product offerings, augment our market coverage, enhance our technical capabilities, or otherwise offer growth opportunities. In the event of such future acquisitions, we could: (1) issue equity securities, which would dilute current stockholders' percentage ownership; (2) incur substantial debt; or (3) assume contingent liabilities. Such actions by us could have a detrimental effect on our results of operations and/or the price of our common stock. Acquisitions also entail numerous risks, including: (1) difficulties in assimilating acquired operations, technologies, products or personnel; (2) unanticipated 22 costs associated with the acquisition that could materially adversely affect our results of operations; (3) negative effects on our reported results of operations from acquisition related charges and of amortization of acquired technology and other intangibles; (4) diversion of management's attention from other business concerns; (5) adverse effects on existing business relationships with suppliers and customers; (6) risks of entering markets in which we have no or limited prior experience; and (7) potential loss of key employees of acquired organizations. OUR VARIED SALES CYCLES COULD HARM OUR RESULTS OF OPERATIONS IF FORECASTED SALES ARE DELAYED OR DO NOT OCCUR. The length of time between the date of initial contact with a potential customer or sponsor and the execution of a contract with the potential customer or sponsor may vary significantly and may depend on the nature of the arrangement. During any given sales cycle, we may expend substantial funds and management resources and yet not obtain significant revenue, resulting in harm to our operations. Further, a significant portion of our sales revenue is derived from our being selected as the service provider under large-scale contracts. The number of major bids for these large-scale contracts for VSAT-based networks in Latin America in any given year is limited and the competition is intense. Losing a relatively small number of bids each year could have a significant adverse effect on our business. IF WE ARE UNABLE TO COMPETE EFFECTIVELY AGAINST OUR CURRENT AND POTENTIAL COMPETITORS, THEN WE MAY LOSE USERS TO OTHER SERVICES RESULTING IN LOWER THAN EXPECTED REVENUES. The market for our products and services is new and rapidly evolving, and we expect competition in and around this market to intensify in the future. While we do not believe any of our competitors currently offer the bundle of products and services we will offer, we face competition from a number of companies. Many of our existing competitors for some of our products and services, as well as potential new competitors, have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical and marketing resources than we do. This may allow such competitors to devote greater resources than we can to the development and promotion of their products and services and to adopt more aggressive pricing policies and make more attractive offers to our potential subscribers, partners, sponsors and e-commerce merchants. RISKS RELATING TO OUR COMMON STOCK AND CAPITAL STRUCTURE. THE PAYMENT OF THE SPECIAL CASH DISTRIBUTION WILL BE SUBJECT TO THE FINANCIAL CONDITION OF RSTAR AND GILAT. We will need to have sufficient available capital or surplus available in order to pay the special cash distributions, if any are required. As part of the StarBand Latin America acquisition, Gilat has agreed that, in the event that we are unable to make the special cash distribution to its stockholders for any reason, Gilat will make a cash capital contribution to us to the extent necessary for us to make the special cash distribution. We cannot give you any assurance that at the time any special distribution is required to be made that either we or Gilat will have sufficient resources available to fund the special cash distribution. This is particularly true since Gilat has recently consummated its own restructuring plan. We do not know how this plan will impact our relationship with Gilat or its obligations under the transaction documents for the StarBand Latin America acquisition. NASDAQ HAS DELISTED OUR COMMON STOCK FROM THE NASDAQ NATIONAL MARKET AND HAS SENT US NOTICES REGARDING THE POSSIBILITY OF DELISTING OUR COMMON STOCK FROM THE NASDAQ SMALLCAP MARKET. On February 14, 2002 we received a notice from the NASDAQ Stock Market that, pursuant to Marketplace Rule 4450(a)(5), our stock could be delisted from the NASDAQ National Market because the stock failed to close above a minimum bid price of $1.00 during the preceding 30 consecutive trading days. Subsequently, we were, in fact, delisted from the NASDAQ National Market System and began trading on the NASDAQ SmallCap market. Our stock has failed to close above a minimum bid price of $1.00 for an extended period of time. On August 27, 2002, we were notified that we had until February 10, 2003, to comply with the minimum bid price requirement. On February 3, 2003 we held a Special Meeting of our shareholders and approved an amendment to the Final Amended and Restated Certificate of Incorporation to effect a reverse stock spilt of our common stock, pursuant to which ten outstanding shares would be converted into one share of common stock. The resolution authorized the Board of Directors to select to act anytime in the following twelve-month period to effect the reverse stock split. Concurrent with the stockholders special meeting, NASDAQ proposed certain regulatory changes which could render the reverse stock split unnecessary. On March 3, 2003, we received a notice from the NASDAQ stating that the NASDAQ Listing Qualifications Panel had determined to continue the listing of our securities on the NASDAQ Small Cap Market, pursuant to a 90-day extension to allow for developments in the rule-making process. On may 30, 2003 NASDAQ determined a continued listing for the company pursuant to and additional ninety (90)-day extension. The continued listing status has been afforded to the Company by NASDAQ pursuant to NASDAQ proposed rule allowing for certain modifications to the bid price rules, including an extended grace period for Small Cap issuers. Given that the Securities and Exchange Commission has yet to approve NASDAQ's rule NASDAQ has granted an additional ninety (90)-day extension, allowing for developments in the rule-making process. 23 A reverse stock split could negatively impact the value of our stock by allowing additional downward pressure on the stock price as our relative value becomes greater following the reverse split. That is to say, the stock, at our new, higher price per share has farther to fall and therefore more room for investors to short or otherwise trade the value of the stock downward. Effective with the open of business on March 5, 2003, our trading symbol was again changed from RTRCE to RSTRC. OUR COMMON STOCK MAY BE DELISTED FROM THE NASDAQ SMALLCAP MARKET, WHICH WOULD IMPAIR THEIR LIQUIDITY. If the shares of our common stock are delisted from the NASDAQ SmallCap Market, their liquidity could be impaired. Though we may decide, among other alternatives, to seek trading of our common stock on the Over-the-Counter Bulletin Board, or OTC market, if our common stock is delisted, the OTC market provides substantially less liquidity than the NASDAQ SmallCap Market, and stocks traded on the OTC market generally trade with larger spreads between the bid and the ask price, which may cause the trading price of our common stock to decline. Also, if we decide to seek trading of our common stock on the OTC market, our common stock would be subject to rules under the Securities Exchange Act of 1934, which impose additional requirements on broker-dealers like making a special suitability determination regarding the purchaser and receiving the purchaser's written consent prior to the sale. This could negatively affect the ability of broker-dealers to sell shares of our common stock and further impair the liquidity of our common stock IF DELISTED, OUR SHARES OF COMMON STOCK MAY BE CHARACTERIZED AS A PENNY STOCK, WHICH MAY SEVERELY HARM THEIR LIQUIDITY. The SEC has adopted regulations which define a penny stock to be any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, these rules require delivery, prior to any transaction in a penny stock, of a disclosure schedule relating to the penny stock market. Disclosure is also required to be made about current quotations for the securities and about commissions payable to both the broker-dealer and the registered representative. Finally, broker-dealers must send monthly statements to purchasers of penny stocks disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. Although we are not currently considered a penny stock, the foregoing penny stock restrictions could apply to our common stock if they are deemed to be "penny stock" and our common stock may not qualify for an exemption from the penny stock restrictions. If our common stock were subject to the rules on penny stocks, its liquidity would be severely harmed. OUR STOCK PRICE HAS BEEN HIGHLY VOLATILE AND HAS EXPERIENCED A SIGNIFICANT DECLINE, PARTICULARLY AND MAY CONTINUE TO BE VOLATILE AND DECLINE. The trading price of our common stock has fluctuated widely in the past and is expected to continue to do so in the future, as a result of a number of factors, many of which are outside our control. In addition, the stock market has experienced extreme price and volume fluctuations that have affected the market prices of many technology companies, particularly telecommunication and Internet-related companies, often unrelated or disproportionate to the operating performance of these companies. These broad market fluctuations could adversely affect the market price of our common stock. In the past, following periods of volatility in the market price of a particular company's securities, securities class action litigation has often been brought against that company. Securities class action litigation involving the company could result in substantial costs and a diversion of our management's attention and resources. BECAUSE WE DO NOT INTEND TO PAY DIVIDENDS, YOU MAY LOSE THE ENTIRE AMOUNT OF YOUR INVESTMENT. We have never declared or paid any cash dividends on our common stock. Subject to certain limited exceptions, we expect to retain our future earnings, if any, for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. Therefore, you will not receive any funds without selling your shares. Pursuant to the StarBand Latin America acquisition, Gilat has agreed not to permit us to pay or declare any dividends or other distributions, other than the special cash distributions, for the longer of (x) one year following the closing of the StarBand Latin America acquisition or (y) the date on which our obligation to make the special cash distributions has been satisfied in full or otherwise terminated in accordance with the terms of the acquisition agreement. Further, our charter has been amended to provide that, until such time as we have satisfied our obligation to make the special cash distribution we are not permitted to declare or pay any dividend or other distributions on any of our capital stock other than our common stock and dividends payable in the form of additional shares of our capital stock. We cannot assure you that you will receive a return on your investment when you sell your shares of our common stock or that you will not lose the entire amount of your investment. WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL CAPITAL TO FUND OUR OPERATIONS WHEN NEEDED. We expect to use our existing cash for general corporate purposes, developing the StarBand Latin America business, as well as working capital and other corporate expenses, including the funding of net losses from operations. We believe that our existing capital resources will be sufficient to meet our cash requirements for at least the next 12 months. However, our cash requirements are large, and depend on several factors, including operating the operations acquired due to the StarBand Latin America acquisition, cash outflows due to lease obligations, our success in generating revenues, the growth of sales and marketing efforts, and other factors. If capital requirements vary materially from those currently planned, we may require additional financing sooner than anticipated. If additional funds are raised through the issuance of 24 equity securities, the percentage ownership of our stockholders will be reduced, and our stockholders may experience additional dilution, or these equity securities may have rights, preferences or privileges senior to those of the holders of our common stock. If additional funds were raised through the issuance of debt securities, such securities would have rights, preferences and privileges senior to holders of common stock and the terms of such debt could impose restrictions on our operations. Additional financing may not be available when needed on terms favorable to us or at all. If adequate funds are not available or are not available on acceptable terms, we may be unable to deploy our business plan, take advantage of future opportunities or respond to competitive pressures. Given Gilat's majority ownership, all future financing decisions will be made by Gilat. RISKS RELATED TO REGULATORY MATTERS GOVERNMENT REGULATION AFFECTING OUR BUSINESS STRATEGY COULD HARM OUR BUSINESS. Laws and regulations directly applicable to communications or commerce over the Internet are becoming more prevalent. These laws or regulations may relate to liability for information retrieved from or transmitted over the Internet, online content regulation, user privacy, taxation and the quality of products and services. In addition, the courts have not yet significantly interpreted these new laws, and consequently their applicability and reach are not defined. Moreover, the applicability to the Internet of existing laws governing issues such as intellectual property ownership, copyright, defamation, obscenity and personal privacy is uncertain and developing. We may be subject to claims that our services violate such laws. Governmental regulations may prevent us from choosing our business partners or restrict our activities due to the StarBand Latin America acquisition. For example, a particular Latin American country may decide that high-speed data networks used to provide access to the Internet should be made available generally to Internet service providers and may require us to provide our wholesale service to any Internet service providers that request it, including entities that compete with us. Additionally, relevant zoning ordinances may restrict the installation of satellite antennas, which might also reduce market demand for our service. Governmental authorities may also increase regulation regarding the potential radiation hazard posed by transmitting earth station satellite antennas' emissions of radio frequency energy, which may negatively impact our business plan and revenues. Any new legislation or regulation, particularly in the United States of America or in Latin America or the application of existing laws and regulations, related to our business could impose significant restrictions, requirements or additional costs on our business, require us to change our operating methods, business strategy, or subject us to additional liabilities and cause the price of our common stock to decline. In particular, we cannot assure you that we will succeed in obtaining all requisite regulatory approvals for our operations in Latin America without the imposition of restrictions on our business, which could have the effect of imposing additional costs on us or limiting our revenues. BECAUSE WE OPERATE IN FOREIGN COUNTRIES, WE MAY FACE LIABILITY UNDER THE U.S. FOREIGN CORRUPT PRACTICES ACT AND OTHER REGULATIONS. We are subject to additional provisions of the U.S. Foreign Corrupt Practices Act, which generally prohibits U.S. companies and their intermediaries from bribing foreign officials for the purpose of obtaining or maintaining business. As a result, we may be exposed to liability under this Act as a result of past or future actions taken with or without our knowledge by our agents, strategic partners or other intermediaries. For many of our activities, we are also subject to the U.S. foreign export control laws. BARRIERS TO INTERNATIONAL EXPANSION COULD LIMIT OUR FUTURE GROWTH. Expansion of our Latin American operations due to the StarBand Latin America acquisition will require significant management attention and financial resources. Expenses incurred in expanding international operations might never result in increased revenue. We face certain risks inherent in conducting business internationally, such as: o difficulties and costs of staffing and managing international operations; o difficulties in recruiting and training an international staff; o difficulties in entering into strategic relationships with companies in international markets; o language and cultural differences; o difficulties in collecting accounts receivable and longer collection periods; and o seasonal business activity in certain parts of the world. Any of these factors could seriously harm our international operations and, consequently, our business. RISKS RELATED TO OUR TECHNOLOGY 25 WE MAY BE SUBJECT TO THIRD PARTY ABUSES OF OUR NETWORKS, SUCH AS COMPUTER VIRUSES, SPAM OR HACKING, WHICH COULD LEAD TO INTERRUPTIONS IN OUR SERVICES AND OTHER ADVERSE CONSEQUENCES. The future success of our business depends on the security of our networks. Computer viruses or problems caused by our users or other third parties, such as the sending of excessive volumes of unsolicited bulk e-mail or spam, could lead to interruptions, delays, or cessation in service to our users. In addition, the sending of spam through our networks could result in third parties asserting claims against us. We may not prevail in such claims and our failure to do so could result in large judgments that would harm our business. Users or other third parties could also potentially jeopardize the security of confidential information stored in our computer systems by their inappropriate use of the Internet, including hacking, which could cause losses to us, or our users or deter persons from using our services. Users or third parties may also potentially expose us to liability by identity theft, or posing as another network user. Unauthorized access by current and former employees or others could also potentially jeopardize the security of confidential information stored in our computer systems and that of our users. We expect that our users will increasingly use the Internet for commercial transactions in the future. Any network malfunction or security breach could cause these transactions to be delayed, not completed at all, or completed with compromised security. Users or others may assert claims of liability against us as a result of any failure by us to prevent these network malfunctions and security breaches, and may deter others from using our services, which could cause our business prospects to suffer. Although we intend to continue using industry-standard security measures, such measures have been circumvented in the past, and we cannot assure you that these measures will not be circumvented in the future. In addition, to alleviate problems caused by computer viruses or other inappropriate uses or security breaches, we may have to interrupt, delay, or cease service to our users, which could severely harm our business. WE ARE DEPENDENT ON LEASED SATELLITE BANDWIDTH, AND IF SUCH A BANDWIDTH IS UNAVAILABLE TO US, WE COULD BE SUBJECTED TO SIGNIFICANT RESTRICTIONS ON OUR BUSINESS. We lease and sublease all of our satellite transponder capacity from satellite providers and through Gilat. If we achieve the growth projected in our business plan, we will need additional satellite capacity. If we are unable to procure this capacity, we may be unable to provide service to our subscribers or the quality of service we provide may not meet their expectations. There is no assurance that these third parties will continue to provide the capacity and positioning we need on reasonable terms, or at all. If we were forced to change our satellite capacity providers, we would be forced to spend significant time and resources finding alternative providers and re-pointing antennas. If, for any reason, we are not able to obtain sufficient capacity on favorable terms, our business could be significantly jeopardized. The satellite industry is a highly regulated industry. In the United States, operation and use of satellites requires licenses from the FCC. As a lessee of satellite space, we could in the future be indirectly subject to new laws, policies or regulations or changes in the interpretation or application of existing laws, policies or regulations, any of which may modify the present regulatory environment in the United States of America. While we believe that our corporate partners will be able to obtain all U.S. and other licenses and authorizations necessary to operate effectively, they may not continue to be successful in doing so. Our failure to indirectly obtain some or all necessary licenses or approvals could impose significant additional costs and restrictions on our business, require us to change our operating methods. UNAUTHORIZED ACCESS COULD HARM OUR BUSINESS AND CAUSE US TO LOSE EXISTING CUSTOMERS, DETER POTENTIAL CUSTOMERS AND HARM OUR REPUTATION. Unauthorized access could potentially jeopardize the security of confidential information stored in the computer systems of our customers, which might cause our subscribers to bring liability claims against us and also might deter potential customers from using our services. Since our services allow end users to be connected to the Internet at all times, unauthorized users may have a greater ability to access information stored in end users' computer systems. Always-on Internet services may give unauthorized users, or hackers, more and longer opportunities to break into end users' computer or access, misappropriate, destroy or otherwise alter data accessed through the Internet. WE MAY BE SUBJECT TO LIABILITY FOR INFORMATION RETRIEVED AND REPLICATED BY MEANS OF OUR SERVICES. Because our customers' end users will download and redistribute material and we may replicate material or store it on our own network devices in connection with our services, claims may be made against us for defamation, or other theories based on the nature and content of such materials. These types of claims have been brought, and sometimes successfully litigated, against online service providers in the past. Although we carry general liability insurance, our insurance may not cover potential claims of these types, or may not be adequate to indemnify us for all liability that may be imposed. Any imposition of liability that is not covered by insurance or is in excess of insurance coverage could result in a substantial reduction in our revenue and losses over a significant period of time. WE ARE HEAVILY DEPENDENT ON OUR RELATIONSHIP WITH GILAT AND WE MAY BE SIGNIFICANTLY HARMED IF GILAT IS UNABLE OR FAILS TO CONTINUE TO DEVELOP AND SELL US THIS TECHNOLOGY AND RELATED EQUIPMENT. We will depend on Gilat and its corporate affiliates and suppliers for the satellite technology used to deliver our products and services. We have an agreement with Gilat pursuant to which, if certain conditions are met, Gilat will serve as our exclusive provider of the equipment, 26 technology and services that we will use in our Latin American operations. If we are not able to perform our obligations under our agreements with Gilat, or if Gilat is unable or fails to continue to sell us this equipment and technology under the current terms of our agreement, our ability to operate our Latin American operations would be severely harmed. Gilat's principal offices, development facilities and manufacturing and research are located in the State of Israel. Gilat is directly affected by the political, economic and military conditions in Israel. Gilat's production is dependent upon components imported from outside of Israel and any major hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners could significantly harm Gilat's ability to meet its supply obligations to us. Recently, Gilat announced a restructuring plan with its major banking creditor and bondholders. The impact of this plan on our relationship with Gilat is unclear. If Gilat does not meet our demand and quality standards for its products, for any reason, or if the terms of our agreements with Gilat change and we decide to pursue other strategic partners, it is unlikely that we would be able to find a replacement supplier without significant harm to our business operations or relationship with Gilat. Our future growth depends on a number of technological advances Gilat expects to attain over its existing satellite technology and which Gilat has agreed to license to us, such as the development of software that we expect will enable us to optimize the allocation of end users across our leased satellite capacity and reduce our satellite capacity costs per end user. Furthermore, Gilat has substantial business operations and opportunities apart from our business, and Gilat may develop different business objectives than ours. As a result, situations may arise in which Gilat's interests diverge from rStar or our other stockholders. For example, we expect to be one of Gilat's largest customers for their technology, equipment and software. We will seek to purchase from Gilat technology, products, software and equipment necessary to the operations of StarBand Latin America at prices favorable to us, but Gilat will seek to sell those items to us at prices favorable to them. If Gilat does not meet our expectations regarding these technological advances, our ability to successfully operate our business, and our financial condition and profitability, would be harmed. OUR SUCCESS DEPENDS UPON THE SUCCESSFUL DEVELOPMENT OF NEW SERVICES AND FEATURES IN THE FACE OF RAPIDLY EVOLVING TECHNOLOGY. The market for our current products and services is characterized by rapidly changing technologies, frequent new service introductions and evolving industry standards. Our future success will depend on our ability to adapt to rapidly changing technologies by continually improving the performance, features and reliability of our networks. We may experience difficulties that could delay or prevent the successful development, introduction or marketing of new features, content or network services. In addition, our new enhancements must meet the requirements of our current and prospective sponsors and subscribers and must achieve significant market acceptance. We could also incur substantial costs if we needed to modify our service or infrastructures to adapt to these changes. OUR DEPENDENCE ON THIRD PARTIES FOR OUR INTELLECTUAL PROPERTY PUTS US AT RISK IF THIS INTELLECTUAL PROPERTY IS NOT PROPERLY PROTECTED OR INFRINGES UPON THE RIGHTS OF OTHERS. We rely exclusively on third parties like Gilat and Spacenet for most of the intellectual property used in our business. If Gilat or any of our other suppliers fails to adequately protect their intellectual property or is found to be infringing on the intellectual property rights of other parties, our ability to operate our business as expected may, in turn, be harmed. Infringement claims could materially harm our business and financial condition. From time to time, we may receive notice of claims of infringement of third parties' proprietary rights. The fields of telecommunications and Internet communications are filled with domestic and international patents, both pending and issued. We may unknowingly infringe such a patent. We may be exposed to future litigation based on claims that our products infringe the intellectual property rights of others, especially patent rights. Someone, including a competitor, might file a suit with little merit, in order to harm us commercially, to force us to re-allocate resources to defending such a claim, or extract a large settlement. In addition, our employees might utilize proprietary and trade secret information from their former employers without our knowledge, even though we prohibit these practices. Any litigation, with or without merit, could be time consuming to defend, result in high litigation costs, divert our management's attention and resources or cause us to delay deployment of related technology. A jury or judge may decide against us even if we had not in fact infringed. If we lose or are forced to settle, we could be required to remove or replace allegedly infringing technology, to develop non-infringing technology or to enter into royalty or licensing arrangements. These royalty or licensing arrangements, if required, may not be available on terms acceptable to us, or at all. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our exposure to market risk for changes in interest rates relates primarily to the increase or decrease in the amount of interest income we can earn on our investment portfolio and on the increase or decrease in the amount of interest expense we must pay with respect to our various outstanding debt instruments. The risk associated with fluctuating interest expense is limited, however, to the expense related to those debt instruments and credit facilities that are tied to market rates. We do not use derivative financial instruments in our investment portfolio. We ensure the safety and preservation of our invested principal funds by limiting default risks, market risk and reinvestment risk. We mitigate default risk by investing in high-credit money market funds. A hypothetical increase or decrease in market interest rates by 10% from the market interest rates at March 31,2003 would not cause the fair value of our cash and cash equivalents or the interest expense paid with respect to our outstanding debt instruments to change by a material amount. Declines in interest rates over time will, however, reduce our interest income while increases in interest rates over time will increase our interest expense. We are also exposed to foreign currency risk as the result of our contracts in Latin America. We attempt to mitigate such risk by entering into contracts denominated in US 27 dollars, however this is not always possible and as such we are exposed to changing exchange rates primarily in Peru, Colombia and Brazil. ITEM 4. CONTROLS AND PROCEDURES Within the 90-day period prior to the date of this report, an evaluation was carried out, under the supervision and with the participation of our management, including our Chief Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective, in all material respects, with respect to the recording, processing, summarizing and reporting, within the time periods specified in the SEC's rules and forms, of information to be required to be disclosed by us in reports that we file or submit under the Exchange Act. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation, nor were there any significant deficiencies or material weaknesses in our internal controls requiring corrective actions. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In March 2001 rStar filed an action against On Technology Corporation (OTC) and subsequently OTC filed a counter claim. In May 2003 the case has been settled including a dismissal with prejudice of the law suit. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS (a) Modification of Constituent Instrument Not applicable. (b) Change in Rights Not applicable. (c) Issuance of Securities The Company did not have any sales of unregistered securities during the period. (d) Use of Proceeds Not applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On February 3, 2003, we held a special meeting of our shareholders who voted and approved an amendment to the Fourth Amended and Restated Certificate of Incorporation to effect a reverse stock split of our Common Stock, pursuant to which ten outstanding shares would be converted into on share of Common Stock. The resolution authorized the Board of Director to act anytime in the following twelve-month period to implement the reverse stock split. 88,832,347 votes were cast in favor of the reverse stock split, 2,160 votes were cast against the reverse stock split and no votes abstained with respect to the reverse stock split. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON 8-K (a) Exhibits 28 i. Exhibit 99.01-Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ii. Exhibit 99.02-Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. iii. Exhibit 99.03 - ENGINEERING, PROCUREMENT AND CONSTRUCTION MANAGEMENT AGREEMENT ("EPCM-TELEPHONY"), entered into by and between Gilat Satellite Networks Colombia S.A. E.S.P. and Gilat Colombia S.A. E.S.P. iv. Exhibit 99.04 - ENGINEERING, PROCUREMENT AND CONSTRUCTION MANAGEMENT AGREEMENT ("EPCM-TELECENTROS"), entered into by and between Gilat Networks Colombia S.A. E.S.P. and Gilat Colombia S.A. E.S.P. v. Exhibit 99.05 - GESAC REPRESENTATIVE AGREEMENT, by and between Gilat do Brasil Ltda. and the Corporation. vi. Exhibit 99.06 - COMPARTEL II REPRESENTATIVE AGREEMENT, by and between Gilat To Home Latin America ("Holland") N.V. and the Corporation. vii. Exhibit 99.07 - Settlement Agreement and General Release, by and between Gilat Satellite Networks Ltd. and Gilat Colombia S.A. ESP (b) Reports on Form 8-K i. We filed a Current Report on Form 8-K dated May 7, 2003 announced that our Board of Directors determined it was in the best interests of the Corporation to agree to extend by three (3) months or ninety (90) days, the transfer of certain entities and shares from Gilat Satellite Networks Ltd.'s ("Gilat") subsidiaries to the Corporation (hereinafter referred to as the "Amendment to the Closing Agreement"). 29 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. rSTAR CORPORATION (Registrant) By: /s/ SAMER F. SALAMEH Samer F. Salameh CHIEF EXECUTIVE OFFICER (PRINCIPAL EXECUTIVE OFFICER) By: /s/ Julia M. Decker Julia M. Decker CONTROLLER (PRINCIPAL FINANCIAL OFFICER) Date: August 14 , 2003 30 CERTIFICATIONS I, certify that: 1. I have reviewed this quarterly report on Form 10-Q of June 30, 2003; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ SAMER F. SALAMEH Date August 14 , 2003 Samer F. Salameh, Chief Executive Officer 31 I, certify that: 1. I have reviewed this quarterly report on Form 10-Q of June 30, 2003; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ JULIA M.DECKER Date August 14, 2003 Julia M Decker Controller (Principal Financial Officer) 32

(Exact name of Registrant as specified in its charter)

Delaware		91-1836242
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1560 Sawgrass Corporate Pkwy, Suite 200 Sunrise, FL 33323 (Address of principal executive offices) Registrant’s telephone number, including area code: (954) 858-1600

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past (90) days. Yes ý No o

The number of shares of the issuer’s Common Stock outstanding as of October 31, 2002 was 104,529,864.

Index

PART I — FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements
	Condensed Consolidated Balance Sheets as of September 30, 2002 (unaudited) and December 31, 2001 (unaudited)
	Condensed Consolidated Statements of Operations for the three months and nine months ended September 30, 2002 and 2001 (unaudited)
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2002 and 2001 (unaudited)
	Notes to Condensed Consolidated Financial Statements (unaudited)
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures about Market Risk
Item 4	Disclosure controls
PART II — OTHER INFORMATION
Item 1.	Legal Proceedings
Item 2.	Changes in Securities and Use of Proceeds
Item 3.	Defaults Upon Senior Securities
Item 4.	Submission of Matters to a Vote of Security Holders
Item 5.	Other Information
Item 6.	Exhibits and Reports on Form 8-K
SIGNATURES
Certifications

RSTAR CORPORATION

FORM 10-Q

QUARTER ENDED SEPTMEBER 30, 2002

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

RSTAR CORPORATION AND ITS SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

U.S. dollars in thousands

	September 30, 2002		December 31, 2001
	Unaudited		Unaudited
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	13,761	$	37,334
Restricted cash	2,046		1,885
Accounts receivables, net	19,436		21,682
Tax receivable	2,525		2,390
Other accounts receivable and prepaid expenses	984		3,063
Inventory	7,592		9,743
Total current assets	46,344		76,097
Long term restricted cash	3,283		4,021
Long term receivables	6,708		141
Property and equipment, net	16,592		21,931
Other assets, net	495		1,081
Net assets of discontinued operations	—		322
Total assets	$	73,422	$	103,593

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

RSTAR CORPORATION AND ITS SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

U.S. dollars in thousands

	September 30, 2002			December 31, 2001
	Unaudited			Unaudited
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Short term bank credit	$	640		$	1,278
Current portion of long term debt	2,284			—
Current portion of capital lease obligations	2,841			4,679
Accounts payable	4,436			7,449
Due to related parties	25,369			35,741
Deferred revenues	1,460			1,254
Accrued expenses and other liabilities	3,840			7,749
Total current liabilities	40,870			58,150
LONG-TERM LIABILITIES
Long-term debt and other long term liabilities	2,305			3,305
Long term deferred revenue	1,613			2,489
Long term capital lease obligations	3,103			3,236
Total liabilities	47,891			67,180
STOCKHOLDERS’ EQUITY
Convertible preferred stock, $0.01 par value Authorized shares-5,000,000, none issued and outstanding at September 30, 2002 and December 31, 2001	—			—
Common stock, $0.01 par value Authorized shares-200,000,000 Issued and outstanding shares 104,529,864 at September 30, 2002 and 63,802,563 at December 31, 2001	1,045			638
Additional Paid-in-Capital	79,496			76,709
Deferred stock compensation	—			(140		)
Notes receivable from stockholders	(6,500		)	(6,500		)
Accumulated other comprehensive income (loss)	161			(126		)
Accumulated deficit	(48,671		)	(34,170		)
Total equity	25,531			36,411
Total liabilities and stockholders’ equity	$	73,422		$	103,591

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

RSTAR CORPORATION AND ITS SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF INCOME

U.S. dollars in thousands

	Three Months Ended September 30						Nine Months Ended September 30
	2002			2001			2002			2001
	Unaudited						Unaudited
Revenues:
Products	$	2,999		$	10,268		$	8,903		$	33,206
Services	4,615			4,552			14,771			11,752
	7,614			14,820			23,674			44,958
Cost of revenues:
Products	404			8,451			3,057			28,614
Services	4,905			6,243			18,105			15,559
Write-off of inventories	1,029			—			1,516			—
	6,388			14,694			22,678			44,173
Gross profit	1,276			126			996			785
Research and development costs, net	127			691			500			2,215
Selling and marketing expenses	90			997			2,097			2,585
General and administrative expenses	5,726			2,998			12,104			8,265
Operating loss	(4,667		)	(4,560		)	(13,705		)	(12,280		)
Financial expenses, net	(156		)	(923		)	(727		)	(4,109		)
Other loss	(455		)	(452		)	(406		)	(395		)
Loss before taxes on income	(5,278		)	(5,935		)	(14,838		)	(16,784		)
Taxes on income	15			1,294			(337		)	258
Loss after taxes on income	(5,293		)	(7,229		)	(14,501		)	(17,042		)
Discontinued operation	—			428			—			11,990
Net Loss	$	(5,293	)	$	(7,657	)	$	(14,501	)	$	(29,032	)
Basic and diluted loss per common share:
Net loss from continuing operations	$	(.06	)	$	(.11	)	$	(.20	)	$	(.32	)
Loss from discontinued operations	—			$	(.01	)	—			$	(.22	)
Net loss per share	$	(.06	)	$	(.12	)	$	(.20	)	$	(.54	)
Shares used in calculation of net loss per common share basic and diluted:	90,411			63,590			72,606			53,397

See accompanying Notes to Condensed Consolidated Financial Statements

RSTAR CORPORATION AND ITS SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

U.S. dollars in thousands

	Nine months ended September 30,
	2002			2001
	Unaudited
Cash flows from operating activities:
Net loss from continuing operations	$	(14,501	)	$	(17,042	)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of deferred stock compensation	132			436
Depreciation	4,693			2,883
Loss on sale of property and equipment	406			301
Increase in deferred income taxes, net	(195		)	(1,757		)
Decrease (increase) in accounts receivables	724			(15,594		)
Increase in other accounts receivable and prepaid expenses	(4,667		)	(1,232		)
Increase (decrease) in accounts payable	(2,807		)	5,355
Increase in related parties	5,761			19,137
Decrease in accrued expenses, other liabilities and deferred revenue	(5,677		)	(1,321		)
Decrease in inventory	3,330			6,103
Net cash used in operating activities from continuing operations	(12,801		)	(2,731		)
Net cash (used in) operating activities from discontinued operations	322			(1,561		)
Net cash flows used in operating activities	(12,479		)	(4,292		)
Cash flows from investing activities:
Purchase of property and equipment	(1,440		)	(4,255		)
Restricted cash	577			(5,333		)
Net cash used in investing activities	(863		)	(10,088		)
Net cash provided by investing activities from discontinued operations	—			5,708
Net cash flows used in investing activities	(863		)	(4,380		)
Cash flows from financing activities:
Proceeds from the issuance of common stock, net	32			286
Borrowing on long term and other debt	2,458			—
Short term bank credit, net	(638		)	451
Payments on lease obligations	(1,969		)	(3,896		)
Payment to acquire minority interest	(9,979		)	(25		)
Net cash used in financing activities	(10,096		)	(3,184		)
Effects of exchange rate changes	(135		)	(84		)
Decrease in cash and cash equivalents	(23,573		)	(11,940		)
Cash and cash equivalents at beginning of period	37,334			49,104
Cash and cash equivalents at end of period	$	13,761		$	37,164

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

RSTAR CORPORATION AND ITS SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

U.S. dollars in thousands

	Nine months ended September 30,
	2002		2001
	Unaudited
Supplemental Disclosures:
Cash paid for interest	$	1,324	$	1,364
Reduction from impairment of school assets	—		9,045
Common stock issued to acquire minority interest	—		(595		)
Common stock issued in settlement of outstanding obligation to related party	—		(45,000		)
Conversion of related party debt to equity	13,003		5,359
Fixed assets obtained from related party	—		3,106

RSTAR CORPORATION

Notes to Condensed Consolidated Financial Statements

September 30, 2002

NOTE 1: BUSINESS DESCRIPTION

Subsequent to the acquisition of StarBand Latin America as described below rStar Corporation discontinued all of its remaining activities and began to operate the StarBand Business model which provides two-way, always-on, high-speed Internet access and telephony to residential and small office/ home office (Soho) customers available virtually everywhere in Latin America via satellite. The StarBand Latin America service provides high-capacity, high-speed transmission of data, audio, telephony and video to consumers and Soho subscribers. It offers stand-alone Internet access as well as a bundled product including telephony services.

On August 2, 2002, we closed the previously announced StarBand Latin America (StarBand) acquisition and issued 43,103,448 shares of Company common stock to Gilat-To-Home Latin America (Holland) N.V., an affiliate of Gilat Satellite Networks Ltd. ("Gilat") in exchange for StarBand Latin America (Holland) B.V., and its subsidiaries. Our stockholders had approved the StarBand Acquisition, and other related transactions, at our Annual Meeting of stockholders held on April 30, 2002. In accordance with the terms of the acquisition agreement between Gilat and rStar, while regulatory approvals required for the transfer of certain of the Latin American entities are pending, rStar assumed all rights, obligations and liabilities with respect to the business conducted by the entities, as of the date of the Closing. In the event that Gilat cannot obtain such regulatory approvals within nine months from the closing date, Gilat will transfer to rStar the parent company of such entities.

As Gilat is the controlling shareholder of both rStar and StarBand Latin America the acquisition has been accounted for as a combination between entities under common control in accordance with APB 16 and FTB 85-5 issue 2 issues Relating to Accounting for Business Combinations, Including Stock Transactions between Companies under Common Control. As such no goodwill has resulted from the transaction and historical amounts are presented similarly to a pooling of interests.

StarBand Latin America currently provides satellite-based rural telephony services in Peru and Colombia as well as high-speed consumer Internet access pilot service in Brazil and Peru. StarBand Latin America expects to work on a wholesale basis with Latin American Internet Service Providers (SSP), DTH TV companies and other service providers in Latin America to offer high- speed Internet access via satellite. Its targeted customers at the wholesale level are major media and ISP companies providing service to Soho and select consumer market segments in Latin America.

Also on August 2, 2002 the Company completed an exchange offer, whereby it purchased 6,315,789 shares of common stock from its shareholders in exchange for .0738 of an ordinary share of Gilat for each share of rStar Common Stock and cash $1.58 per share. The amount was determined based on a formula as shown below, which was based on the average trading price of Gilat’s stock for the 10 trading period ending 5 days prior to the expiration of the offer. In addition, rStar exchanged 3,789,473 shares of rStar of the tendered shares with Gilat

for 466,105 Gilat ordinary shares in order to provide for the Gilat stock consideration for the exchange offer, as described above.

With the completion of the exchange offer and the StarBand Acquisition, Gilat’s beneficial ownership of the outstanding rStar shares increased to approximately 85%.

During the third quarter, management has elected to suspend all activities relating to AutoNetworks, an 85% owned subsidiary of the Company.

In accordance with the Agreement, in the event that the StarBand Latin America business, as defined does not achieve certain net income targets agreed to by the parties during each of the one year periods ended June 30, 2003 and June 30, 2004, rStar stockholders of record as of June 30, 2003 or June 30, 2004 will be entitled to their pro rata share of a special distribution equal to either $2.5 million or $5 million in cash, depending upon the net income. Specifically, (i) if the net income for the StarBand Latin America business for the period from July 1, 2002 through June 30, 2003 is less than or equal to $1,600,000, the Special Distribution shall be $5,000,000, (ii) if the net income for the StarBand Latin America business for the period from July 1, 2002 through June 30, 2003 is greater than $1,600,000 and less than or equal to $2,500,000, the Special Distribution shall be $2,500,000, (iii) if the net income for the StarBand Latin America business for the period from July 1, 2002 through June 30, 2003 is greater than $2,500,000, the Special Distribution shall be zero, (iv) if the net income for the StarBand Latin America business for the period from July 1, 2003 through June 30, 2004 is less than or equal to $11,000,000, the Special Distribution shall be $5,000,000, (v) if the net income for the StarBand Latin America business for the period from July 1, 2003 through June 30, 2004 is greater than $11,000,000 and less than or equal to $16,500,000, the Special Distribution shall be $2,500,000, and (vi) if the net income for the StarBand Latin America Business for the period from July 1, 2003 through June 30, 2004 is greater than $16,500,000, the Special Distribution shall be zero.

NOTE 2: BASIS OF PRESENTATION

As Gilat has been the controlling shareholder of both rStar and StarBand Latin America (StarBand”) since January 2001, the acquisition has been accounted for as a combination between entities under common control in accordance with Accounting Principles Board Opinion No. 16 “Business Combination” (“APB 16”). As such no goodwill has resulted from the transaction and historical amounts are presented similarly to a pooling of interests. Accordingly, rStar’s historical financial statements have been restated to include the consolidated financial position, results of operations, and cash flows of StarBand for all periods presented. In previous financial statements presentations the statements of StarBand Latin America did not present both components if its business as it was the intention of Gilat to sell to rStar only the StarBand services business as described in Note 1. The business, which represents strictly equipment sales was carved out of the results. Following the closing, it was determined that certain equipment sales going forward would be included in rStar's business. Thus in accordance with EITF 90-16 “Accounting for Discontinued Operations Subsequently Retained” these financial statements present all of the historical amounts of the entities acquired without the aforementioned carve out.

The accompanying unaudited condensed consolidated financial statements include the accounts of rStar and its subsidiaries consolidated with StarBand and its subsidiaries for all periods presented, all inter-company accounts and transactions have been eliminated in consolidation. Further, our now discontinued advertiser—supported educational network business and fundraising business (the school Business) is presented as a discontinued operation. In February 2001, our board of directors approved a formal plan to discontinue our School Business. For comparative purposes, the consolidated statements of operations and related (loss) income per share information, for all periods presented, have been restated to reflect the results of operations for the discontinued business in sncome (loss) from discontinued operations. The consolidated balance sheets at September 30, 2002 and December 31, 2001 reflect assets and liabilities related to the School Business as set assets of discontinued operations. The Consolidated Statement of Cash Flows for the nine months ended September 30, 2002 and 2001 reflects separately cash flows from discontinued operations. The unaudited condensed consolidated financial information as of September 30, 2002 and 2001 includes all adjustments (consisting only of normal recurring adjustments) that the Company considers necessary for a fair presentation of the results for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for the full fiscal year or for any future period. These financial statements should be read in conjunction with the financial statements and related notes as of and for the year ended December 31, 2001 included in the Company’s Form 10k.

Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission.

NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

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

Cash and Cash Equivalents

The Company considers all highly liquid investments with maturity of three months or less at the time of purchase to be cash equivalents except for restricted cash and cash equivalents.

Restricted Cash

At September 30, 2002 and December 31, 2001, the company had restricted cash of approximately $5,329,000 and $5,906,000, respectively primarily relating to a sale-leaseback transaction (see Note 11).

Inventories

Inventories are stated at the lower of cost or market value. The company periodically reviews its inventory for impairment to cover risks arising from slow-moving items or technological obsolescence. Inventory consists primarily of finished goods that are in transit to customers or inventory held for replacement and maintenance of operating sites. As of September 30, 2002 and December 31, 2001, such inventory amounted to approximately $7.6 million and $9.7 million, respectively. For the nine and three months ended September 30, 2002 Company recorded a write-off of impaired inventory of approximately $1.5 million and $1.0 million, respectively.

Property and Equipment

Property and equipment includes network equipment, computers, office furniture and equipment, and leasehold improvements and are stated at historical cost. The costs of additions and leasehold improvements are capitalized, while maintenance and repairs are expensed as incurred. Property and equipment are depreciated using the straight-line method over estimated useful lives of three to seven years. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the asset.

Property and equipment does not include assets that are held for sale in the normal course of business.

Other assets

Other assets consist, mainly of withholding taxes, prepayments and advances and are stated at cost.

Concentrations of credit risks

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents; short-term and long-term bank deposits, trade receivables, long-term receivables and loans to affiliates.

Cash and cash equivalents and short-term and long-term bank deposits are invested mainly in major banks in United States. Such deposits in the United States may be in excess of insured limits and are not insured in other jurisdictions. Management believes that the financial institutions that hold the Company’s investments are financially sound and, accordingly, minimal credit risk exists with respect to these investments.

The trade receivables and long-term trade receivables of the Company derive from sales to major customers located in the Latin America. The Company performs ongoing credit evaluations of its customers and obtains letters of credit for certain receivables. An allowance for doubtful accounts is determined with respect to those amounts that the Company has determined to be doubtful of collection.

Income taxes

The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards (“SFAS”) 109, “Accounting for Income Taxes”. This statement prescribes the use of the asset and liability method whereby deferred tax assets and liability account balances are determined based on differences between financial reporting and tax based assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to be settled. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value. As the entities comprising the Company have a history of losses on a cumulative basis, no tax has been provided.

Commitments and contingencies

Liabilities for loss contingencies, arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.

The Company accrues for losses associated with obligations when such losses are probable and reasonably estimable. Such accruals are adjusted as further information develops or circumstances change.

Revenue Recognition

In December 1999, the Securities and Exchange Commission released Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements. SAB No. 101 is effective in the fiscal quarter commencing October 1, 2000 and provides clarification of existing authoritative guidance with regard to the manner and timing of revenue recognition. The Company elected to adopt the guidance provided by SAB No. 101 effective upon the Company’s commencement of operations.

The Company receives revenue from the sale and installation of equipment and for the provision of services, such as Internet access and telephony services. In accordance with SAB 101 the Company recognized revenues when the products are delivered to the customer, provided that no significant obligations remain. Provisions, if material, are made for an estimate of product returns and doubtful accounts, based on historical experience. In situations where installation services are an integral component of the equipment use, revenue is recognized only upon such installation. The Company typically ships its goods on ex works or free on board (“FOB”) shipping point basis, therefore title passes to the buyer upon shipment.

Service revenues is recognized ratably over the contractual period or as services are performed. Where arrangements involve multiple elements, revenue is allocated to each element based on the relative fair value of the element when sold separately.

Deferred revenue includes unearned amounts received under services contracts, and amounts received from customers but not yet recognized as revenues.

Impairment of Long Lived Assets

The Company assesses the impairment of long-lived assets, including intangible assets, in accordance with Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long Lived Assets and for Long Lived Assets to be Disposed of (“SFAS No. 121”). SFAS No. 121 requires impairment losses to be recognized for long-lived assets when indicators of impairment are present and the undiscounted cash flows are not sufficient to recover the assets’ carrying amounts. Intangibles are also evaluated for recoverability by estimating the projected undiscounted cash flows, excluding interest, of the related business activities. The impairment loss of these assets is measured by comparing the carrying amount of the asset to its fair value less disposal costs with any excess of carrying value over fair value written off. Fair value is based on market prices where available, an estimate of market value, or various valuation techniques including discounted cash flow.

Stock Based Compensation

The Company applies the intrinsic value-based method of accounting prescribed APB Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations including FASB interpretation No. 44, “Accounting for Certain Transactions involving Stock Compensation” an interpretation of APB Opinion No. 25 issued in March 2000, to account for its fixed plan stock options. Under this method, compensation expense is recorded on the date of the grant only if the current market price of the underlying stock exceeds the exercise price. SFAS No.123 “Accounting for Stock-Based Compensation,” established accounting and disclosure requirements using the fair value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123 StarBand Latin America has elected to continue to apply the intrinsic value method of accounting described above, and has adopted the disclosure provisions of SFAS No.123.

The Company applies SFAS No. 123, “Accounting for Stock-Based Compensation” and EITF 96-18, “Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring in Conjunction with Selling Goods or Services” with respect to warrants issued to non-employees. SFAS No. 123 requires the use of option valuation models to measure the fair value of the warrants at the date of grant.

Recently issued accounting standards

In June 2001, the FASB issued SFAS No. 141, Business Combinations, (SFAS No. 141) and SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). The Company adopted the provisions of SFAS No. 141 as of July 1, 2001, and SFAS No. 142 is effective January 1, 2002. As of the date of adoption of SFAS No. 141, the Company had not entered into any business combinations subject to the transition provisions of SFAS No. 141. As of the date of adoption of SFAS No. 142, the Company expects to have no unamortized goodwill or unamortized identifiable intangible assets subject to the transition provisions of SFAS No. 142. There is currently no anticipated impact of adopting SFAS No. 141 and No. 142 on the Company’s financial statements.

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations (SFAS No. 143). SFAS No. 143 requires the Company to record the fair value of an

asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and/or normal use of the assets. The Company also records a corresponding asset, which is depreciated over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation will be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. The Company is required to adopt SFAS No. 143 on January 1, 2003. The Company has not yet evaluated the impact of adopting SFAS No. 143; however, does not anticipate any significant impact on the Company’s financial statements.

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144). SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. SFAS No. 144 requires companies to separately report discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. The Company is required to adopt SFAS No. 144 on January 1, 2002. The Company has not yet evaluated the impact of adopting SFAS No.144; however, it does not anticipate any significant impact on the Company’s financial statements.

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS No. 145 provides for the rescission of several previously issued accounting standards, new accounting guidance for the accounting for certain lease modifications and various technical corrections to existing pronouncements that are not substantive in nature. SFAS No. 145 will be adopted on January 1, 2003, except for the provisions relating to the amendment of SFAS No. 13 “Accounting for Leases,” which will be adopted for transactions occurring subsequent to May 15, 2002. The Company believes that the adoption of SFAS No. 145 will not have a material impact on its financial statements.

In June 2002, the FASB issued SFAS No. 146, “Accounting for Exit or Disposal Activities.” SFAS No. 146 addresses significant issues regarding the recognition, measurement and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for pursuant to the guidance that the Emerging Issues Task Force (“EITF”) has set forth in the EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The scope of SFAS No. 146 also includes (1) costs related to terminating a contract that is not a capital lease, and (2) termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred compensation contract. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The Company believes that the adoption of SFAS No. 146 will not have a material impact on its financial statements.

NOTE 4: - PROPERTY AND EQUIPMENT, NET

Property and equipment consist of the following:

Amounts In (000’s)	Estimated Useful Lives	September 30 2002			December 31, 2001
		(Unaudited)			(Unaudited)
Network equipment	5-7 years	$	20,124		$	20,501
Computer, software	3-5 years	5,188			5,773
Office furniture and equipment and other	5 years	1,768			1,678
		27,080			27,952
Less accumulated depreciation and amortization		(10,488		)	(6,021		)
		$	16,592		$	21,931

Included in Network equipment as of September 30, 2002 and December 31, 2001 are assets under capital leases of approximately $5.2 million (see Note 10).

NOTE 5: - Taxes Receivable

Taxes receivable consists of recoverable value added taxes paid to local governments upon the acquisition and importation of equipment required for the Company’s operations. Such taxes may be offset against future value added tax credits generated from revenues in the local countries. The Company regularly reviews the collectibility of such tax receivables.

NOTE 6: - short term bank credit and Long Term Debt

Long-term debt consists of bank loans for working capital purposes. Such loans are typically at rates of Libor plus 3.25% to 4.75% and have terms of between 6 months and 18 months. As of September 30, 2002 and December 30, 2001 such loans amounted to approximate $2.3 million and $0, respectively, as of September 30, 2002 the amount classified as long term amounted to $174,000.

The Company also borrows money on a short-term basis at rates ranging from 2.35% to 6.5%. The amounts are typically due within 90 days. Total short term bank credit were approximately $640,000, $1,278,000 as of September 30, 2002 and December 31, 2001, respectively.

NOTE 7: - SHAREHOLDERS’ EQUITY

Exchange offer

On August 9, 2002, we accepted for exchange 6,315,789 shares of Company common stock validly tendered in the exchange offer, which is the maximum number of shares rStar and Gilat offered to exchange in the exchange offer. The exchange offer expired at midnight, New York City time, on Friday, August 2, 2002. The exchange agent for the exchange offer advised us that a total of 19,086,916 shares of rStar common stock had been validly tendered, the pro-ration provisions described in the Offer to Exchange/Prospectus dated June 25, 2002 applied. The exchange agent also advised us that the final pro-ration factor applicable to each rStar stockholder who validly tendered their shares in the exchange offer is 33.09%. The consideration for each of the rStar shares accepted for exchange, consisting of a $1.58 per share or $9,978,947 and 0.0738 per share or 466,105 shares of Gilat ordinary shares, all of which was distributed by the exchange agent.

Stock Options

At the closing rStar committed to exchange .6860 options for each outstanding option in StarBand. At closing there were 2,834,235 outstanding options in StarBand, which based on the conversion ratio would equal 1,921,206 options of rStar. All of the options are 10-year options and have an exercise price of $0.15 per share. Vesting is generally over a 4-year period; however certain options vested immediately upon issuance.

The following table summarizes information about stock options outstanding as of September 30, 2002:

	Number		Weighted Average Exercise Price
Options outstanding at thebeginning of the year	1,937,529		$	1.59
Changes during the year:
Granted
StarBand Latin America converted options	1,921,206		0.15
Exercised	(150,169	)	0.21
Forfeited and cancelled	(399,619	)	1.59
Options outstanding at the end of the year	3,308,947		0.79
Options exercisable at the end of the year	2,391,574		0.71

In accordance with FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation — An Interpretation of APB Opinion No. 25 (“FIN No. 44”) stock options issued to employees are accounted for under APB 25, whereas stock options issued to non-employees or employees of affiliated companies are accounted for under SFAS No.123 — Accounting for Stock-Based Compensation as interpreted by EITF 00-23 — Issues Related to the Accounting for Stock Compensation under APB Opinion No. 25 and FASB Interpretation No. 44. Based on this interpretation, the fair value of the award at grant date has been reported as a stock dividend.

The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

Expected dividend yield	0%
Expected stock price volatility	100	%
Risk-free interest rate	5.0	%
Expected option term	5 years

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

Warrants

We had the following warrants outstanding at September 30, 2002 to purchase shares of stock:

Stock Types	Exercise Price Per Share		Expiration of Warrants	Number of Shares
Common	$	3.00	May 2003	250,000
Common	$	3.50	May 2003	250,000
Common	$	5.00	June 2003	100,000
Common	$	5.00	December 2003	150,000
Common	$	5.00	September 2004	50,000
Total				800,000

Post closing share adjustment

In accordance with the StarBand Acquisition Agreement, rStar and Gilat will make certain adjustments to the equity holding as follows:

• If the Company’s net income as defined for the period from July 1, 2002 through June 30, 2003 is greater than or equal to $4,100,000 but no more than $4,900,000, rStar will be required to issue 2,685,382 shares of common stock to Gilat. If the Net income is greater

than or equal to $4,900,000 the shares will be increase to 5,370,765.

• If the Company’s net income as defined for the period from July 1,2003 through June 30, 2004 is greater than or equal to $27,500,000, but no more than $33,000,000, rStar will be required to issue 2,685,382 shares of common stock to Gilat. . If the Net income is greater than or equal to $33,000,000 the shares will be increase to 5,370,765.

NOTE 8: - NET LOSS PER SHARE

Basic loss per share is computed based on the weighted average number of ordinary shares outstanding during each period. Diluted loss per share is computed based on the weighted average number of ordinary shares outstanding during each period, plus dilutive potential ordinary shares considered outstanding during the period, in accordance with SFAS No. 128, “Earnings per Share”.

The following table presents the calculation of unaudited basic and diluted earnings per share (in thousands, except per share amounts):

	Three months ended September 30,						Nine months ended September 30,
	2002			2001			2002			2001
Net loss from continuing operations	$	(5,293	)	$	(7,229	)	$	(14,501	)	$	(17,042	)
Income (loss) from discontinued operations	—			(428		)	—			(11,990		)
Loss applicable to common stockholders	(5,293		)	(7,657		)	(14,501		)	(29,032		)
Weighted-average shares of common stock outstanding	90,411			63,690			72,406			53,397
Less: weighted-average shares subject to repurchase	—			(100		)	—			(100		)
Weighted-average shares of common stock outstanding used in computing basic net loss per common share	90,411			63,590			72,606			53,297
Basic and diluted net loss per common share from continuing operations	$	(.06	)	$	(.11	)	$	(.20	)	$	(.32	)
Basic and diluted net income per common share from discontinued operations	—			$	(.01	)	—			$	(.22	)
Basic and diluted net loss per common share	$	(.06	)	$	(.12	)	$	(.20	)	$	(.54	)

For the three months and nine months ended September 30, 2002 and 2001, we have excluded all convertible preferred stock, warrants to purchase common and preferred convertible stock, outstanding stock options and stock subject to repurchase from the calculation of diluted net loss per common share because all such securities are anti-dilutive. At September 30, 2002 there were 4,108,947 such shares subject to issuance.

In the three and nine month periods ended September 30, 2001, 100,000 shares subject to repurchase were excluded from the weighted average shares outstanding.

NOTE 9: - Commitments

In 1999, we entered into credit lines with a number of lease finance companies for the purpose of acquiring computer and network equipment in schools. These lease arrangements bear interest from 10.5% to 18% and have terms ranging from 24 to 36 months. As of September 30, 2002, we had capital leases with seven lessors, representing a total present value obligation of approximately $1,049,000, all of which will come due within the next 12 months.

On September 28, 2001, the Company completed a sale leaseback transaction whereby the Company sold its Peruvian telephony network and other assets with a book value of approximately $3.6 million for approximately $5.2 million, resulting in a gain of approximately $1.6 million, which was deferred and is being accreted into income over the estimated useful life of the assets. The lease is being accounted for as a capital lease.

The agreement requires the Company to lease and operate the telephony network back from the seller for a period of three years for twelve quarterly payments of approximately $430,000. At the end of the lease, the Company has an option to purchase the telephony network at the expected fair market value of approximately $540,000. In the event that the company does not exercise its option the seller will assess a penalty for approximately $522,000. In connection with the lease the Company was obligated to place the proceeds in a restricted account as a guarantee for the payments. Such amounts are included in restricted cash.

Interest expense on capital leases was $80,000 and $345,000 for the three months ending September 30, 2002 and 2001, respectively. For the nine-month periods ending September 30, 2002 and 2001 such expenses were $645,000 and $1,600,000 respectively. For the nine months periods, $0 and $904,000, respectively, were attributable to our leases with Spacenet, an affiliate. For the three-month periods ended September 30, 2002 and 2001 no interest expense was attributable to leases with an affiliate.

Legal claims

On March 7, 2001, rStar (then known as ZapMe! Corporation) filed action against a software vendor, ON Technology Corporation (“OTC”), by which rStar alleged that OTC breached a software license agreement and defrauded rStar concerning the capabilities of the software. By its complaint, rStar seeks recovery of approximately $390,000 rStar paid to OTC in connection with the software, as well as other damages. On or about March 29, 2001, OTC filed a counterclaim against rStar, alleging that the principal sum of approximately $308,000 is due from rStar for additional license fees, maintenance fees, and professional fees in connection with OTC’s software.

On or about October 22, 2001, STM Wireless, Inc. (“STM”) filed an action alleging that the named defendants, including rStar, improperly interfered with STM’s bid to provide telecommunication services to rural areas of Peru. STM’s complaint seeks unspecified damages. As this suit is in the early stages, the Company is unable to determine probability of a negative outcome to this matter.

On December 13, 2001, NextiraOne filed a breach of contract action against rStar seeking the principal sum of $180,000 for unpaid computer hardware allegedly sold and shipped to rStar. The action was settled in October 2002.

NOTE 10: GEOGRAPHIC INFORMATION

a. Summary information about geographical areas (in thousands):

The Company and its subsidiaries operate in one business segment, the marketing and providing of services for very small aperture terminal (“VSAT”) satellite earth stations. See Note 1 for a brief description of the Company’s business. The following data is presented in accordance with SFAS No. 131, “Disclosure About Segments of an Enterprise and Related Information.” The following is a summary of operations within geographic areas based on customer’s location.

	Three months ended September 30,				Nine months ended September 30,
	2002		2001		2002		2001
	Unaudited
Revenues from sales to unaffiliated customers:
Peru	$	6,463	$	9,365	$	18,487	$	13,451
Colombia	714		2,736		1,980		14,866
Brazil	429		2,719		3,154		16,641
Others	8		—		54		—
	$	7,614	$	14,820	$	23,675	$	44,958

b. Summary information about geographical areas (in thousands):

	September 30, 2002		December 31, 2001
	Unaudited		Unaudited
Long-lived assets, by geographic region:
Peru	$	15,659	$	14,922
Colombia	3,549		3,952
Brazil	1,406		1,809
United States	6,464		6,491
	$	27,078	$	27,174

Revenues from single customers, which exceed 10% of total revenues in the reported years, as a percentage of total revenue:

	September 30, 2002		September 30, 2001
	Unaudited		Unaudited
Customer 1	67.4	%	29.7	%
Customer 2	—		33.1	%
Customer 3	13.9	%	9.8	%
Customer 4	—		19.0	%

NOTE 11: - RELATED PARTY TRANSACTIONS

On April 23, 2001, the Company, Spacenet, and Gilat Satellite Networks, Ltd., (“Gilat”) a then 51% shareholder of the Company, entered into an agreement pursuant to which the Company would issue approximately 19.3 million shares of its common stock to Spacenet (or its affiliate—assignee) in full satisfaction of the Company’s outstanding obligations to Spacenet amounting to approximately $45,000,000. On May 21, 2001, the Company issued such shares of its common stock to Gilat Satellite Networks (Holland) B.V. The Company recorded the settlement of the outstanding obligations as a capital contribution in stockholders’ equity.

We purchased satellite and other services and previously leased a majority of the computer equipment deployed for the discontinued School Business from Spacenet.

In January 2002, the Company entered into a Settlement Agreement and Mutual Release with Rick Inatome, the Company’s former Chief Executive Officer, in connection with claims asserted by Mr. Inatome under his written employment agreement and a written consulting agreement Mr. Inatome entered into with the Company upon his resignation as Chief Executive Officer in October 2000. The agreement provides that Mr. Inatome would receive $182,388 upon execution, plus $275,000 to be paid in twice-monthly installments commencing January 16, 2002 through and including January 31, 2003, plus $6,000 monthly for a full-time secretary and leased office space commencing March 1, 2002 through and including February 28, 2003. At December 31, 2001 we accrued for this amount in full, which amounted to approximately $530,000. As of September 30, 2002, $180,000 remained accrued.

We paid a director of the Company’s Board $120,000 during the nine months ended September 30, 2002 for consulting services in connection with the StarBand Acquisition Agreement. The consulting services began on February 1, 2001, for an initial term of six months at $20,000 per month, and has continued on a month to month basis at $20,000 per month thereafter. These consulting services were terminated on August 2, 2002.

Related party debts are due to Gilat and various Gilat controlled entities. These amounts are the net of certain liabilities that are not transferring to rStar and are expected to be eliminated either through payment with existing cash or upon collection of accounts receivables or liquidation of other excluded assets. As of the closing Gilat was not able to remove certain assets and liabilities from these entities and as such has left a related party debt equal to such excess assets. The risks and rewards of these assets and liabilities are with Gilat and therefore in the event that certain receivables are not collected or assets are not realized, there will be no change

to net amounts due to related parties. It is the intention of Gilat to re-capitalize or forgive any such debts in excess of excluded assets.

The table below reflects the assets and liabilities, which are not included in the acquisition as of the closing.

(Amounts in Thousands)	August 2, 2002
Assets
Cash and cash equivalents	$	622
Accounts receivable, net	18,080
Inventory	4,566
Long term receivables	7,008
Total assets	$	30,276
Liabilities
Accounts payable	$	4,305
Accrued expenses	2,318
Current portion of long term debt	2,135
Other liabilities	996
Debt and other long term liabilities	1,063
Due to Gilat	24,503
Total liabilities	35,320
Liabilities to be re-capitalized or forgiven	(5,044		)
Adjusted total liabilities	$	30,276

Prior to the closing related party debts of approximately $12 million were converted to equity by Gilat and as of the closing there remains approximately $5 million of additional debt that Gilat has committed to convert to equity.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statement

Certain matters discussed in this document may constitute forward—looking statements under Section 27A of the Securities Act of 1933, as amended (the securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the exchange Act). These statements may involve risks and uncertainties. These forward—looking statements relate to, among other things: (i) our expectation to generate revenues by charging end users for Internet access and other services, and by charging suppliers for the dedicated connection, e-commerce services and advertising access to their customers; (ii) our expectation to generate revenue from a number of sources—end users of our industry-specific networks and vendors to those communities of users, as well as customers of the StarBand Latin America business; (iii) our belief that end users will pay a fee for broadband Internet access, industry-specific content and other bundled products and services; (iv) our belief that vendors will pay for the right to occupy a priority position on our networks; (v) our expectation to provide much of our earth segment to customers by purchasing or renting satellite dishes, hubs and send/receive cards for our network servers and our expectation to purchase the space segment from Spacenet; (vi) our belief that our available cash resources and amounts available under financing facilities will be sufficient to meet our expected working capital and capital requirements (including the exchange offer in connection with the Starband Acquisition) for the next 12 months based on our current business plan; (vii) our expectations with respect to the StarBand Latin American business;and (viii) our belief that continued investment in research and development will contribute to attaining our strategic objectives, including the development of new business markets. These statements are not guarantees of future performance and are subject to business and economic risks and uncertainties, which are difficult to predict. Therefore, the Company’s actual results of operation may differ materially from those expressed or forecasted in the forward-looking statements as a result of a number of factors, including, but not limited to, those set forth in this discussion under factors Affecting Our Business, Operating Results and Financial Condition_ and other risks detailed from time to time in reports filed with the SEC.

All forward-looking statements of the Company are qualified by and should be read in conjunction with such risk disclosure. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise..

Overview

Following the closing of the acquisition of StarBand Latin America B.V. ("SLA") on August 2, 2002, rStar has committed a significant portion of its resources and technical expertise to the Latin American market for voice and data services. The SLA business operates satellite-based rural telephony networks in certain Latin American countries, as well as high-speed consumer Internet access pilot networks in certain other countries. SLA works on a wholesale basis with Latin American ISP’s, PTTs, government entities and other providers to offer high-speed Internet access and telephony services via satellite. The target customer is expected to be the small office/home office and select consumer market segments in Latin America.

Under the Closing Agreement of SLA Acquisition, the legal transfer of the Latin American entities to be transferred to SLA is pending government regulatory approvals. If these approvals are not obtained within nine months from the closing date, Gilat will transfer to rStar the parent company of such entities. Despite the pending transfers, rStar has assumed all rights, obligations and liabilities with respect to the businesses conducted by the entities as of the closing.

Under the acquisition agreement, StarBand Latin America entered into a master services

and supply agreement with Gilat pursuant to which SLA received specified services and products from Gilat necessary to conduct its business in Latin America.

Pursuant to this agreement, Gilat and its subsidiaries have granted to SLA the exclusive rights in Latin America (excluding Mexico, but including, among others, Brazil, Argentina, Peru, Colombia and, subject to certain restrictions, Chile) to:

• Implement, operate and market its broadband Internet access services and voice services to consumers and small office/home office subscribers,

• Provide a bundled product with direct-to-home television service using its single satellite dish technology; and

• Provide such new technologies and products related to the foregoing as Gilat may in the future develop or make available to StarBand Communications Inc., which shall be offered to SLA upon commercially reasonable terms via a two-way satellite-based network.

In Mexico, SLA has only limited non-exclusive rights. In Chile, Gilat and its affiliates are not limited or otherwise restricted from conducting business with certain entities.

Under the master services and supply agreement, Gilat provides SLA with the facilities, telecommunications equipment, licensed software and services that it uses in its business.

From September 1997 through October 2000 our principal focus was building an advertiser-supported network serving the education market (the School Business). Due to changes in our School Business, which led to its discontinuation, we decided to focus our efforts toward becoming a provider of satellite-based services to vertical markets. Management has discontinued this business as well in order to focus solely on the StarBand Latin America business model.

In connection with our change in business focus, we have undergone significant reductions-in-force during 2001 and 2002. These actions, combined with attrition, have reduced our headcount approximately 83% from 120 employees at December 31, 2000 to 18 employees as of June 30, 2002. In connection with the SLA acquisition, the remaining employees were terminated including the CEO and the CFO during the the 3rd quarter ended September 30, 2002. Also in connection with the SLA acquisition we obtained through subsidiary companies of StarBand Latin America approximately 115 employees, mostly located in Latin America. In addition, Gilat is providing headquarter personnel during the transition period. It is anticipated that we will increase our headcount in the near term. Total severance costs associated with these actions equaled approximately $735,000 for the twelve months of 2001, and approximately $2.0 million for the nine months ended September 30, 2002. These costs have been charged to operations.

Basis of presentation

As Gilat is the controlling shareholder of both rStar and StarBand Latin America the acquisition has been accounted for as a combination between entities under common control in accordance with APB 16. As such no goodwill has resulted from the transaction and historical amounts are presented similarly to a pooling of interests. Accordingly, rStar’s historical financial

statements have been restated to include the consolidated financial position, results of operations, and cash flows of StarBand for all periods presented. Therefore the discussions below include both the activities of rStar and that of StarBand Latin America.

RESULTS OF OPERATIONS

We believe that, due to the change in business scope, the discontinued operations and the changing climate of business in Latin America, period-to-period comparisons of our operating results are not meaningful and should not be relied upon as predictive of future performance. Our prospects must be considered in light of the risk, expenses and difficulties frequently encountered by companies in the early stage of development, particularly companies in new and rapidly evolving markets. We may not be successful in addressing such risks and difficulties.

Revenues

The majority of our revenues are from the implementation of rural telephony and Internet networks in Latin America. Revenue is received for the equipment, installation of that equipment and for services performed from the networks such a telephony and Internet. We classify equipment installation revenue as part of services. A significant portion of that revenue comes from foreign governments. These contracts are won on a bid-by-bid basis and, as such, are considered non-recurring. In 2001, the Company won bids from the Government of Peru amounting to $39 million.

For the nine months ended September 30, 2002 the Company has not won nor has it participated in any bids. The Company expects that the recurring revenue will increase over time as the networks are fully implemented and utilized.

Products

Revenues from product sales decreased $24.3 million (73.2%) from $33.2 million for the nine months ended September 30, 2001 to $8.9 million for the nine months ended September 30, 2002. This was attributable mainly to a decrease in product sales and to the fact that there were no bids won during 2002.

For the three months ended September 30, 2002, revenues from product sales decreased $7.3 million (70.8%) from $10.2 million for the three months ended September 30, 2001 to revenues of $3.0 million for the three months ended September 30, 2002 for the same reasons stated above.

Services

Revenues from services increased $3.0 million (25.7%) from $11.8 million for the nine months ended September 30, 2001 to $14.8 million for the nine months ended September 30, 2002. This was attributable to the implementation of the bids won in 2001, which was performed in 2002. We expect service revenues to decrease in the near term as the majority of the implementations have been completed as of September 30, 2002

For the three months ended September 30, 2002, revenues from services increased $63,000 (1.4%) to $4.6 million as compared to revenues of $4.5 million for the three months ended September 30, 2001 for the same reasons stated above.

Cost of Revenues

The majority of our cost of revenues consists of the cost of equipment for the Government projects noted above. The margins attributable to the equipment portion are typically much larger than the margin on the services, however it is non-recurring in nature. We anticipate that upon maturation of the various networks that our continuing operations, cost of revenue will consist primarily of depreciation on network equipment, the cost of administering our satellite communications network and the cost of space segment necessary to provide such services and installing satellite signal-receiving equipment at customer sites. The costs associated with this form of telecommunication include (1) the cost of land-based equipment, or Earth segment, such as the satellite dishes, hubs, send/receive cards located inside the network servers (2) the cost of the link to and from the satellite, or Space segment (3) interconnection fees with local providers.

Products

For the nine months ended September 30, 2002, cost of revenues from product sales decreased $25.6 million (89.3%) from $28.6 million for the year ended September 30, 2001 to $3.1 million for the nine months ended September 30, 2002. The decrease was attributable to a decrease in Product Sales in 2002 and the fact that there were no bids won during the year.

Cost of revenues from product sales for the three months ended September 30, 2002 decreased $8.0 million (95.2%) to $0.4 million as compared to $8.4 million for the nine months ended September 30, 2001. Such a decline was attributable to the decrease in revenues from products sales as discussed above.

Services

For the nine months ended September 30, 2002, cost of revenues from services increased $2.6 million (16.4%) from $15.6 million for the year ended September 30, 2001 to $18.1 million for the nine months ended September 30, 2002. The increase was attributable to the implementation of bids won in 2001. Other than installation services, cost of revenues consisted primarily of operational expenses for our existing networks in Colombia and Peru.

Cost of revenues for the three months ended September 30, 2002 decreased $1.3 million (21.4%) to $4.9 million as compared to $6.2 million for the nine months ended September 30, 2001 as a result of the completion of the implementation projects that were signed during 2001.

Research and Development

Research and development expenses for our continuing operations were $0.5 million and $2.2 million for the nine months ended September 30, 2002 and 2001, respectively, representing costs of personnel and overhead associated with the development of our new industry-specific private network business, the majority of which relate to furthering the development of our

managed browser for use in that business. The sharp decline of $1.7 million (77.4%) in expense in 2002 was largely due to the decrease in the number of personnel and the decision by management to stop further development of these technologies.

For the three months ended September 30, 2002 and 2001, research and development expenses were $0.1 million and $0.7 million, respectively. The decline of $0.6 (81.6%) in expense in 2002 was largely due to the decrease in the number of personnel required for our research and development efforts and the decision by management to stop further development of these technologies.

To date, we have not capitalized any software development costs under Statement of Financial Accounting Standards (SFAS) No. 86 under which certain software development costs incurred subsequent to the establishment of technological feasibility are capitalized and amortized over the estimated lives of the related products. Technological feasibility is established upon completion of a working model. To date, costs incurred subsequent to the establishment of technological feasibility have not been significant, and all such software development costs have been charged to research and development expense as incurred.

Sales and Marketing

Sales and marketing expenses for continuing operations for the nine months ended September 30, 2002 and 2001 were $2.1 million and $2.6 million, respectively, representing costs of personnel and overhead associated with initiating our new industry-specific private network business. This decrease of $0.5 million (19.2%) is attributable to reduced sales and marketing payroll due to significant reductions in headcount.

For the three months ended September 30, 2002 and 2001, expenses were $0.1 million and $1.0 million, respectively. The decrease of $0.9 million (90.0%) the significant reductions in sales and marketing payroll as the result of the reduced headcounts throughout the first nine months of 2002.

General and Administrative

General and administrative expenses for the nine months ended September 30, 2002 and 2001 were $12.1 million and $8.3 million, respectively. The increase of $3.8 million ($45.8%) represents the costs of professional and consulting costs relating to the StarBand Acquisition, which totaled approximately $0.5 million and severance costs which amounted to approximately $2.0 million during the nine months ended September 30, 2002. The StarBand Acquisition is a combination of two entities under common control, as such; all transaction costs have been expensed as incurred.

General and administrative expenses for the three months ended September 30, 2002 amounted to $5.7 million as compared to 3.0 for the same period last year. The increase in primarily the result of the severance and other costs of the acquisition of StarBand as discussed above.

Financial Expenses, net

Financial expenses include interest income, interest expenses and foreign currency gains

and losses. Financial expenses totaled $0.7 million for the nine months ended September 30, 2002 compared to $4.1 million for the same period in 2001. The decrease in financial expenses is a combination of diminishing cash balances available for investment at lower interest rates and a reduction in interest expense relating to the expiration of significant capital lease obligation during 2002, including a related party lease with Spacenet, a wholly owned subsidiary of Gilat.

In April 2001 we agreed to exchange our lease obligation with Spacenet in exchange for equity in rStar. No interest expense for any period of 2002 was incurred with Spacenet, a related party. Related party interest in 2001 totaled $904,000 for the three and nine month periods ended September 30, 2001.

Loss for discontinued operations

There were no gains or losses from discontinued operations in 2002 because as of the start of the year all School Business assets had been sold. The $12.0 million loss during first nine months of 2001 was a result of a $5.9 million charge recorded to cover principally the cost of excess space segment bandwidth consumed by the School Business that resolved a discrepancy between Spacenet and the Company and $9.0 million impairment charges to reflect a revised estimate of the net proceeds to be obtained from the sale of School Business assets. Partially offsetting these charges were actual expenses that were lower than the original estimates for which a reserve was established in December 2000.

Liquidity and Capital Resources

On April 23, 2001, we entered into an agreement to issue 19,396,552 shares of its common stock to Gilat Satellite Networks (Holland) B.V. (Spacenet’s affiliate-assignee) in full satisfaction of the Company’s outstanding capital lease obligations to Spacenet of approximately $45,000,000. These shares were issued on May 21, 2001 and significantly reduced our cash obligations. In addition during 2001 we significantly reduced our headcount, which further decreased our cash obligations.

We believe that our available cash resources will be sufficient to meet our expected working capital and capital expenditure requirements for the next 12 months based on our current business model as conducted through September 30, 2002. The StarBand Acquisition, however, results in the addition of a substantial new business to the Company and new management. The financial requirements of that business may vary significantly based on a number of factors, including, the speed with which service is expanded, the impact that competitive offerings have on market prices and terms, the ability of the Company to forecast its expenses and the terms it receives from its vendors, among other things (See Risk Factors). Consequently, we may seek to raise additional funds. Additionally, we may require additional capital to develop new satellite-based private networks, respond to competitive pressures, acquire complementary technologies, or respond to unanticipated developments.

We may seek to raise additional funds through private or public sales of securities, strategic financial and business relationships, bank debt, lease financing, or otherwise. If additional funds are raised through the issuance of equity securities, the percentage of the Company owned by existing stockholders will be reduced, stockholders may experience additional dilution, and these equity securities may have rights, preferences, or privileges senior to those of the holders of our common stock. Additional financing may not be available on acceptable terms, if at all. If adequate funds are not available or are not available on acceptable terms, we may be unable to

deploy or enhance our networks, develop the business acquired in the StarBand Acquisition, take advantage of future opportunities, or respond to competitive pressures or unanticipated developments, which could severely harm our business.

Related Party Transactions

The Company has engaged in a number of transactions with related parties. Please see Note 5 to the financial statements, Related Party Transactions and Note 11 to the financial statements, “Subsequent Events”, for a description of these transactions.

FACTORS AFFECTING OUR BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION

Investors should carefully consider the risks described below. We operate in a rapidly changing environment that involves a number of risks, some of which are beyond our control. The risks described below are not the only ones we face. Additional risks we are not presently aware of or that we currently believe are immaterial may also impair our business operations. Our business could be harmed by any of these risks. The trading price of our common stock could decline due to any of these risks, and investors may lose all or part of their investment. In assessing these risks, investors should also refer to the other information contained in our filings with the Securities and Exchange Commission, including our consolidated financial statements and other notes.

Risks relating to our Business.

We have an unproven business model and we may not realize any benefits from the StarBand Acquisition.

Achieving the benefits of the StarBand Acquisition will depend, in part, on our ability to integrate the StarBand Latin America business, technology, operations and personnel into our operations. The integration of StarBand Latin America will be a complex, time consuming and expensive process and may disrupt our business if not completed in a timely and efficient manner. Among other challenges involved in this integration are (i) obtaining the regulatory approvals required to transfer certain Latin American operations from Gilat to rStar, (ii) ensuring that Gilat provides rStar with the economic benefit of such operations until such time as the regulatory approvals have been obtained; (iii) retaining key personnel and addressing any adverse changes in business focus; and (iv) maintaining the necessary cash and other resources to meet our expected working capital and capital expenditure requirements, including the cash that we may have to pay our stockholders pursuant to the special cash distribution.

An investor in our common stock must carefully consider the risks and difficulties frequently encountered by companies in an early stage of development, as well as the risks we face due to our participation in a new and rapidly evolving market. Our business strategy may not be successful and it may not successfully overcome these risks.

We Have Incurred Substantial Losses and Anticipate Continued Losses.

We incurred net losses of approximately from our inception through September 30, 2002, which losses resulted primarily from costs related to developing our discontinued education network business, deploying the network to schools and developing content and features for the network. We have also had significant losses in our operation in Latin America and as of today have not achieved profitability. We expect to have continued net losses and negative cash flows for the foreseeable future. We will need to generate significant additional revenues to achieve profitability. It is possible that we will never achieve profitability, and even if we do achieve profitability, we may not sustain or increase profitability on a quarterly or annual basis in the future. If we do not achieve or sustain profitability in the future, then we may be unable to continue our operations.

We Expect Our Quarterly Financial Results to Fluctuate and Our Recent Shift to Our Current Business Limits Management’s Ability to Predict Revenues and Expenses Precisely.

Our quarterly and annual operating results have varied in the past and are likely to fluctuate significantly in the future due to a variety of factors, many of which are outside of our control. Factors that might cause quarterly fluctuations in our operating results include the factors described in the accompanying subheadings. To respond to these and other factors, we may need to make business decisions that could impact our quarterly operating results. Most of our expenses are relatively fixed in the short term. Moreover, our expense levels are based, in part, on our expectations regarding future revenue levels in connection with our current business. As a result, if total revenues for a particular quarter are below our expectations we may not be able to proportionately reduce our operating expenses for that quarter. This revenue shortfall might then have a disproportionate effect on our expected operating results for that quarter. Consequently, management believes that period-to-period comparisons of our operating results are not necessarily meaningful, and should not be viewed as indicators of our future performance in connection with our current business. In addition, during future periods our quarterly or annual operating results may fail to meet the expectations of securities analysts or investors. In this case the trading price of our common stock would likely decrease.

Gilat Can Exercise Total Influence Over rStar.

As of September 30, 2002, Gilat beneficially owned approximately 86% of our common stock. Gilat will, therefore, be able to exercise total control over all such matters as the election of our directors and other fundamental corporate transactions such as mergers, asset sales and the sale of rStar. Additionally, our Third Amended and Restated Certificate of Incorporation permits, as allowed by the Delaware General Corporation Law, Gilat to undertake certain actions without calling and holding a special meeting of stockholders and to call a special meeting of rStar stockholders at any time. Accordingly, the influence of our other stockholders will be limited and may depress our stock price. Also, we cannot assure you that the interests of Gilat will not, from time to time, conflict with your interests as a stockholder.

We May Not Realize any Benefits from the StarBand Acquisition.

Achieving the benefits of the StarBand Acquisition will depend, in part, on the integration of StarBand Latin America’s business, technology, operations and personnel into our operations. The integration of StarBand Latin America into rStar is a complex, time consuming and expensive process and may disrupt our business if not completed in a timely and efficient manner. Among the challenges involved in this integration are (i) demonstrating to our customers, suppliers, and strategic partners that the acquisition will not result in adverse changes in client service standards or business focus, (ii) persuading personnel that rStar’s and StarBand Latin America’s business cultures are compatible, (iii) retaining key personnel and addressing any adverse changes in business focus. We do not have experience in integrating operations on the scale represented by the acquisition, and it is not certain that we will be able to successfully integrate StarBand Latin America into our operations in a timely manner or at all, or that any of the anticipated benefits of the acquisition will be realized. Failure to do so could seriously harm our business, financial condition and operating results.

We May Suffer Foreign Exchange Rate Losses.

Following the StarBand Acquisition, our international revenues and expenses are denominated in local currency. Therefore, a weakening of other currencies compared to the U.S. dollar could make our products less competitive in foreign markets and could negatively affect our operating results and cash flows. We do not currently engage in currency hedging activities, although in some instances we will reserve the right to engage in such activities. We have not yet, but may in the future, experience significant foreign currency transaction losses, especially to the extent that we do not engage in currency hedging.

The Success of Our International Operations Is Dependent on Many Factors Beyond Our Control Which Could Adversely Affect Our Ability to Offer Our Products and Services in Latin America and Our Profitability.

Due to the StarBand Acquisition, our international operations in Latin America have increased our exposure to international laws and regulations. If we cannot comply with foreign laws and regulations, which are often complex and subject to variation and unexpected changes, we could incur unexpected costs, delays and potential litigation. For example, the governments of foreign countries might attempt to regulate our products and services or levy sales or other taxes relating to our activities. In addition, foreign countries may confiscate our products or impose tariffs, duties, price controls or other restrictions on foreign currencies or trade barriers, any of which could make it more difficult for us to conduct our business. In addition, our international operations in Latin America are also subject other factors beyond our control, such as political and economic instability, including the current political instability throughout Latin America.

Our expansion in foreign markets requires us to respond to rapid changes in market conditions in these countries. Our overall success as an international business will depend, in part, upon our ability to succeed in differing economic, social and political conditions. We may not continue to succeed in developing and implementing policies and strategies that are effective in each location where we do business due to the StarBand Acquisition.

We Have No Previous Experience in the Latin American Market and Our Ability to be Successful in that Market is Uncertain.

Through the StarBand Acquisition, we have expanded our business operations into the delivery of satellite-based telephony and Internet access services in Latin America. We have limited previous experience in the Latin American market, and have limited meaningful historical financial and operational data upon which we can base projected revenues and planned operating expenses and upon which you may evaluate our prospects in Latin America. The Latin America satellite-based telephony and Internet access market is an untested market for us and the results of these operations are uncertain and unpredictable. As a company expanding its business in the satellite-based telephony and Internet access market in Latin America, we face risks relating to our ability to implement our business plan, including our ability to continue to develop and upgrade our technology, our ability to maintain and develop customer and supplier relationships, obtain key technology and the necessary governmental and regulatory approvals, consents and licenses. We may not adequately address these risks, and if we do not, we may not be able to implement our business plan as we intend. Our business model contemplates that we will generate revenues, through wholesale sales to Latin American Internet Service Providers,

DTH TV companies and other service providers. The revenues may not materialize if we fail to implement our strategy for attracting wholesale customers. You should consider our business and prospects in light of the heightened risks and unexpected expenses and problems we may face in an emerging market place. An investor in our common stock must carefully consider the risks and difficulties frequently encountered by companies that are still developing their business plan, as well as the risks we face due to our participation in a new and rapidly evolving market in Latin America. Our business strategy may not be successful and it may not successfully overcome these risks.

Failure to Manage the Growth of Our Operations Could Harm Our Business and Strain Our Managerial, Operational and Financial Resources.

Due to the StarBand Acquisition, we have recently and significantly changed our business model and strategy. We anticipate that future expansion will be required to successfully implement our business strategy. We may not be able to implement management information and control systems in an efficient and timely manner, and our current or planned personnel, systems, procedures and controls may not be adequate to support our future operations. If we were unable to manage growth effectively, our business would suffer. To manage the expected growth of our operations and personnel, we will be required to: (1) improve existing and implement new operational, financial and management controls, reporting systems and procedures; (2) install new management information systems; and (3) train, motivate and manage our sales and marketing, engineering, technical and customer support employees.

Our employees, outsourcing arrangements, systems, procedures and controls may be inadequate to support our future operations. In particular, due to the StarBand Acquisition, we expect that demands on the network infrastructure and our technical support resources will increase rapidly as our customer base grows. We may therefore experience difficulties meeting a high demand for services in the future or encounter problems in dealing with the customs of various countries in Latin America. In order to meet this demand, we will need to hire, train and retain the appropriate personnel, as well as the third-party service providers we depend on for customer service, to manage our operations. We will also need to adapt our financial and management controls, billing and information systems, reporting systems and operating systems. Our failure to manage growth and expansion effectively, or the failure by one of our service providers to adequately perform its services, could harm our ability to retain or grow our customer base which in turn would harm our business, financial condition and results of operations.

We Rely Heavily on Our Key Partners, Who are Related Parties, and if They Terminate Their Strategic Alliances with Us or if the Arrangements Fail to Meet Our Objectives, We May Experience Significant Difficulty and Our Revenue Growth May Suffer.

We rely heavily on our strategic alliance relationships with Gilat and its wholly owned subsidiary, Spacenet. Our arrangements with Gilat and Spacenet are complex and as a result, there are many risks related to these arrangements, including some that we may not have foreseen. It is difficult to assess the likelihood of occurrence of these risks, including the lack of success of the overall arrangements to meet the parties’ objective or the financial condition of Gilat and its affiliates. For example, Gilat recently announced a restructuring plan with some of its creditors. It is unclear whether this plan will affect our relationship with Gilat. If we fail to maintain these relationships, as anticipated, or if our partners do not perform to our expectations, the performance of our networks, and our ability to generate revenues, may be harmed.

If Gilat is unable to provide us with the licenses and services we require, we may be unable to provide our services and our business will be harmed.

We will depend upon Gilat and its subsidiaries in Latin America and the United States to provide us with the services that are required to run our business and provide our services, especially due to the StarBand Acquisition. For example, we are not a licensee in the United States or in any Latin America country and do not hold any authorizations to operate satellite communication facilities. We will depend totally upon the licenses held by the subsidiaries of Gilat located in the United States and in Latin America for our products and services. If their licenses are limited or revoked, if any legal or regulatory restrictions are imposed on extending their services to us, or if the United States or any Latin American country limits the number of their earth stations or if they fail to operate the earth stations providing service to subscribers of our wholesale customers, in a satisfactory manner, our business could be seriously harmed.

The Market Price of Our Common Stock May Decline as a Result of the StarBand Acquisition.

In connection with the StarBand Acquisition, we issued new shares of rStar common stock to Gilat and certain of its subsidiaries, further diluting our results of operations on a per-share basis. This dilution could reduce the market price of our common stock unless and until we achieve revenue growth or cost savings and other business economies sufficient to offset the effect of the issuance of additional shares. Additionally, the market price of our common stock may decline as a result of the transactions if:

• the integration of rStar and StarBand Latin America is unsuccessful;

• we do not achieve the perceived benefits of the StarBand Acquisition as rapidly or to the extent anticipated by financial or industry analysts or investors; or

• the effect of the StarBand Acquisition on our financial results is not consistent with the expectations of financial or industry analysts or investors.

The Loss of Key Personnel May Hurt Our Ability to Operate Our Business Effectively.

Our success depends, in part, upon the continued contributions of the principal members of our sales, engineering and management departments, many of whom perform important management functions and would be difficult to replace. The loss of the services of any key personnel could seriously harm our business.

If We Are Unable to Retain and Hire Additional Qualified Personnel as Necessary, We May Not Be Able to Successfully Achieve Our Objectives.

Like all technology companies, we must compete for talented employees to develop our products, services, and solutions in a market where the demand for such individuals exceeds the number of qualified candidates. As a result, our human resources organization focuses significant efforts on attracting and retaining individuals in key technology positions. If we experience a substantial loss of, or an inability to attract, talented personnel, the resulting talent gap could affect our ability to meet our business objectives.

We May Engage in Future Acquisitions that Dilute Our Stockholders and Result in Increased Debt and Assumption of Contingent Liabilities.

As part of our business strategy, we may consider acquisition prospects that would complement our current product offerings, augment our market coverage, enhance our technical capabilities, or otherwise offer growth opportunities. In the event of such future acquisitions, we could: (1) issue equity securities, which would dilute current stockholders’ percentage ownership; (2) incur substantial debt; or (3) assume contingent liabilities.

Such actions by us could have a detrimental effect on our results of operations and/or the price of our common stock. Acquisitions also entail numerous risks, including: (1) difficulties in assimilating acquired operations, technologies, products or personnel; (2) unanticipated costs associated with the acquisition that could materially adversely affect our results of operations; (3) negative effects on our reported results of operations from acquisition related charges and of amortization of acquired technology and other intangibles; (4) diversion of management’s attention from other business concerns; (5) adverse effects on existing business relationships with suppliers and customers; (6) risks of entering markets in which we have no or limited prior experience; and (7) potential loss of key employees of acquired organizations.

Our Varied Sales Cycles Could Harm Our Results of Operations if Forecasted Sales Are Delayed or Do Not Occur.

The length of time between the date of initial contact with a potential customer or sponsor and the execution of a contract with the potential customer or sponsor may vary significantly and may depend on the nature of the arrangement. During any given sales cycle, we may expend substantial funds and management resources and yet not obtain significant revenue, resulting in harm to our operations. Further, a significant portion of our sales revenue is derived from our being selected as the service provider under large-scale contracts. The number of major bids for these large-scale contracts for VSAT-based networks in Latin America in any given year is limited and the competition is intense. Losing a relatively small number of bids each year could have a signficant adverse effect on our business.

If We Are Unable to Compete Effectively Against Our Current and Potential Competitors, Then We May Lose Users to Other Services Resulting in Lower Than Expected Revenues.

The market for our products and services is new and rapidly evolving, and we expect competition in and around this market to intensify in the future. While we do not believe any of our competitors currently offer the bundle of products and services we will offer, we face competition from a number of companies. Many of our existing competitors for some of our products and services, as well as potential new competitors, have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical and marketing resources than we do. This may allow such competitors to devote greater resources than we can to the development and promotion of their products and services and to adopt more aggressive pricing policies and make more attractive offers to our potential subscribers, partners, sponsors and e-commerce merchants.

Risks regarding our common stock and capital structure.

The Payment of the Special Cash Distribution will be subject to the financial condition of rStar and Gilat.

We will need to have sufficient available capital or surplus available in order to pay the special cash distributions, if any are required. As part of the StarBand Acquisition, Gilat has agreed that, in the event that rStar is unable to make the special cash distribution to its stockholders for any reason, Gilat shall make a cash capital contribution to rStar to the extent necessary for rStar to make the special cash distribution. We cannot give you any assurance that at the time any special distribution is required to be made that either rStar or Gilat will have sufficient resources available to fund the special cash distribution. This is particularly true since Gilat has recently announced a restructuring plan. We do not know how this plan will impact our relationship with Gilat or its obligations under the transaction documents for the StarBand Acquisition.

NASDAQ has Delisted Our Common Stock from the Nasdaq National Market and has Sent Us Notices Regarding the Possibility of Delisting Our Common Stock From the Nasdaq SmallCap Market.

On November 21, 2002, we received a notice from the Nasdaq regarding deficiencies in the Company's compliance with certain of the Nasdaq's continued listing requirements and that such deficiencies could result in the immediate delisting of the Company's common stock from the Nasdaq SmallCap Market. In particular, the Company was advised that the Company's common stock could be delisted because it had failed to timely file its Form 10-Q for the quarter ended September 30, 2002, as required by Nasdaq Marketplace Rule 4310(c)(14). The Company was advised that the Nasdaq Listing Qualification Panel (the "Panel") would be considering this delinquency in determining whether continued listing of rStar' common stock on the Nasdaq SmallCap Market is appropriate. Notwithstanding the filing of the Form 10-Q, the Panel can determine to delist the Company's securities from the Nasdaq SmallCap Market. The Company does not know when the Panel will reach its decision, or that such a decision will be favorable to the Company. An unfavorable decision by the Panel would result in immediate delisting of the Company's common stock from the Nasdaq irrespective of the Company's ability to appeal the decision. Effective with the open of business on Tuesday, November 26, 2002, the trading symbol of the Company's common stock was changed to "RTRCE" from "RSTRC."

On February 14, 2002 we received a notice from the Nasdaq Stock Market that, pursuant to Market place Rule 4450 (a)(5), our stock could be delisted from the Nasdaq National Market because the stock failed to close above a minimum bid price of $1.00 during the preceding 30 consecutive trading days. Subsequently, the Company was, in fact, delisted from the National Market System and began trading on the Nasdaq SmallCap market under the symbol “RSTRC”. The Company’s stock has failed to close above a minimum bid price of $1.00 for an extended period of time. On August 27, 2002, the Company was notified that it has until February 10, 2003, to comply with the minimum bid price requirement. A common course of action for companies attempting to maintain their listing by ensuring a bid price in excess of $1.00 is the institution of a reverse stock split. At present, we have made no decision with respect to this course of action but will continue to evaluate this alternative in light of all other options, including accepting a delisting determination. A reverse stock split could negatively impact the value of our stock by allowing additional downward pressure on the stock price as our relative value becomes greater following the reverse split. That is to say, the stock, at our new, higher price per share has farther to fall and therefore more room for investors to short or otherwise trade the value of the stock downward.

Our Shares of Common Stock May be Delisted from the NASDAQ SmallCap Market, Which Would Impair Their Liquidity.

If the shares of our common stock are delisted from the Nasdaq SmallCap Market, their liquidity will be impaired. Though we may decide, among other alternatives, to seek trading of our common stock on the Over-the-Counter Bulletin Board, or OTC market, if our common stock is delisted, the OTC market provides substantially less liquidity than the Nasdaq SmallCap Market, and stocks traded on the OTC market generally trade with larger spreads between the bid and the ask price, which may cause the trading price of our common stock to decline.

Also, if we decide to seek trading of our common stock on the OTC market, our common stock would be subject to rules under the Securities Exchange Act of 1934, which impose additional requirements on broker-dealers like making a special suitability determination regarding the purchaser and receiving the purchaser’s written consent prior to the sale. This could negatively affect the ability of broker-dealers to sell shares of our common stock and further impair the liquidity of our common stock

If Delisted, Our Shares of Common Stock May Be Characterized as a Penny Stock, Which May Severely Harm Their Liquidity.

The SEC has adopted regulations which define a penny stock to be any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, these rules require delivery, prior to any transaction in a penny stock, of a disclosure schedule relating to the penny stock market. Disclosure is also required to be made about current quotations for the securities and about commissions payable to both the broker-dealer and the registered representative. Finally, broker-dealers must send monthly statements to purchasers of penny stocks disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. Although we are not currently considered a penny stock, the foregoing penny stock restrictions will not apply to our shares of common stock if our shares of Common Stock are deemed to be “penny stock”: Our common stock may not qualify for an exemption from the penny stock restrictions. If our shares of common stock were subject to the rules on penny stocks, the liquidity of our common stock would be severely harmed.

Our Stock Price Has Been Highly Volatile and Has Experienced a Significant Decline, Particularly and May Continue to Be Volatile and Decline.

The trading price of our common stock has fluctuated widely in the past and is expected to continue to do so in the future, as a result of a number of factors, many of which are outside our control. In addition, the stock market has experienced extreme price and volume fluctuations that have affected the market prices of many technology companies, particularly telecommunication and Internet-related companies, and that have often been unrelated or disproportionate to the operating performance of these companies. These broad market fluctuations could adversely affect the market price of our common stock. In the past, following periods of volatility in the market price of a particular company’s securities, securities class action litigation has often been brought against that company. Securities class action litigation could result in substantial costs and a diversion of our management’s attention and resources.

Because We Do Not Intend to Pay Dividends, You May Lose the Entire Amount of Your Investment.

We have never declared or paid any cash dividends on our common stock. Subject to certain limited exceptions, we expect to retain our future earnings, if any, for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. Therefore, you will not receive any funds without selling your shares. Pursuant to the StarBand Acquisition, Gilat has agreed not to permit rStar to pay or declare any dividends or other distributions, other than the special cash distributions, for the longer of (x) one year following the closing of the StarBand Acquisition or (y) the date on which rStar’s obligation to make the special cash distributions has been satisfied in full or otherwise terminated in accordance with the terms of the acquisition agreement. Further, our Certificate of Incorporation has been amended to provide that, until such time as rStar has satisfied its obligation to make the special cash distributions, it shall not be permitted to declare or pay any dividend or other distributions on any of its capital stock other than rStar common stock and dividends payable in the form of additional shares of rStar capital stock. We cannot assure you that you will receive a

return on your investment when you sell your shares of rStar common stock or that you will not lose the entire amount of your investment.

We May Not be Able to Obtain Additional Capital to Fund Our Operations When Needed.

We expect to use our existing cash for general corporate purposes, developing the StarBand Latin America business, as well as working capital and other corporate expenses, including the funding of net losses from operations. We believe that our existing capital resources will be sufficient to meet our cash requirements for at least the next 12 months. However, our cash requirements are large, and depend on several factors, including operating the operations acquired due to the StarBand Acquisition, cash outflows due to lease obligations, our success in generating revenues, the growth of sales and marketing efforts, and other factors. If capital requirements vary materially from those currently planned, we may require additional financing sooner than anticipated. If additional funds are raised through the issuance of equity securities, the percentage ownership of our stockholders will be reduced, and our stockholders may experience additional dilution, or these equity securities may have rights, preferences or privileges senior to those of the holders of our common stock. If additional funds were raised through the issuance of debt securities, such securities would have rights, preferences and privileges senior to holders of common stock and the terms of such debt could impose restrictions on our operations. Additional financing may not be available when needed on terms favorable to us or at all. If adequate funds are not available or are not available on acceptable terms, we may be unable to deploy our business plan, take advantage of future opportunities or respond to competitive pressures. Given Gilat’s majority ownership and control of the Board of Directors, all future financing decisions will be made by Gilat.

Risks related to regulatory matters.

Government Regulation Affecting Our Business Strategy Could Harm Our Business.

Laws and regulations directly applicable to communications or commerce over the Internet are becoming more prevalent. These laws or regulations may relate to liability for information retrieved from or transmitted over the Internet, online content regulation, user privacy, taxation and the quality of products and services. In addition, the courts have not yet significantly interpreted these new laws, and consequently their applicability and reach are not defined. Moreover, the applicability to the Internet of existing laws governing issues such as intellectual property ownership, copyright, defamation, obscenity and personal privacy is uncertain and developing. We may be subject to claims that our services violate such laws.

Governmental regulations may prevent us from choosing our business partners or restrict our activities due to the StarBand Acquisition. For example, a particular Latin American country may decide that high-speed data networks used to provide access to the Internet should be made available generally to Internet service providers and may require us to provide our wholesale service to any Internet service providers that request it, including entities that compete with us. Additionally, relevant zoning ordinances may restrict the installation of satellite antennas, which might also reduce market demand for our service. Governmental authorities may also increase regulation regarding the potential radiation hazard posed by transmitting earth station satellite antennas’ emissions of radio frequency energy, which may negatively impact our business plan and revenues.

Any new legislation or regulation, particularly in the United States of America or in Latin America or the application of existing laws and regulations, related to our business could impose significant restrictions, requirements or additional costs on our business, require us to change our operating methods, business strategy, or subject us to additional liabilities and cause the price of our common stock to declineIn particular, we cannot assure you that we will succeed in obtaining all requisite regulatory approvals for our operations in Latin America without the imposition of restrictions on our business, which could have the effect of imposing additional costs on us or limiting our revenues.

Because We Will Operate in Foreign Countries, We May Face Liability Under the U.S. Foreign Corrupt Practices Act and Other Regulations.

We are subject to additional provisions of the U.S. Foreign Corrupt Practices Act, which generally prohibits U.S. companies and their intermediaries from bribing foreign officials for the purpose of obtaining or maintaining business. As a result, we may be exposed to liability under this Act as a result of past or future actions taken with or without our knowledge by our agents, strategic partners or other intermediaries. For many of our activities, we are also subject to the U.S. foreign export control laws.

Barriers to International Expansion Could Limit Our Future Growth.

Expansion of our Latin American operations due to the StarBand Acquisition will require significant management attention and financial resources. Expenses incurred in expanding international operations might never result in increased revenue. We face certain risks inherent in conducting business internationally, such as:

• difficulties and costs of staffing and managing international operations;

• difficulties in recruiting and training an international staff;

• difficulties in entering into strategic relationships with companies in international markets;

• language and cultural differences;

• difficulties in collecting accounts receivable and longer collection periods; and

• seasonal business activity in certain parts of the world.

Any of these factors could seriously harm our international operations and, consequently, our business.

Risks related to our technology.

We May Be Subject to Third Party Abuses of Our Networks, such as Computer Viruses, Spam or Hacking, Which Could Lead to Interruptions in Our Services and Other Adverse Consequences.

The future success of our business depends on the security of our networks. Computer viruses or problems caused by our users or other third parties, such as the sending of excessive volumes of unsolicited bulk e-mail or spam, could lead to interruptions, delays, or cessation in service to our users. In addition, the sending of spam through our networks could result in third parties asserting claims against us. We may not prevail in such claims and our failure to do so could result in large judgments that would harm our business. Users or other third parties could also potentially jeopardize the security of confidential information stored in our computer systems by their inappropriate use of the Internet, including hacking, which could cause losses to us, or our users or deter persons from using our services. Users or third parties may also potentially expose us to liability by identity theft, or posing as another network user. Unauthorized access by current and former employees or others could also potentially jeopardize the security of confidential information stored in our computer systems and that of our users.

We expect that our users will increasingly use the Internet for commercial transactions in the future. Any network malfunction or security breach could cause these transactions to be delayed, not completed at all, or completed with compromised security. Users or others may assert claims of liability against us as a result of any failure by us to prevent these network malfunctions and security breaches, and may deter others from using our services, which could cause our business prospects to suffer. Although we intend to continue using industry-standard security measures, such measures have been circumvented in the past, and we cannot assure you that these measures will not be circumvented in the future. In addition, to alleviate problems caused by computer viruses or other inappropriate uses or security breaches, we may have to interrupt, delay, or cease service to our users, which could severely harm our business.

We Are Dependent on Leased Satellite Bandwidth, and if Such a Lease is Unavailable to Us, We Could be Subjected to Significant Restrictions on Our Business.

We lease all of our satellite transponder capacity from satellite providers. If we achieve the growth projected in our business plan, , we will need additional satellite capacity. If we are unable to procure this capacity, we may be unable to provide service to our subscribers or the quality of service we provide may not meet their expectations. There is no assurance that these third parties will continue to provide the capacity and positioning we need on reasonable terms, or at all. If we were forced to change our satellite capacity providers, we would be forced to spend significant time and resources finding alternative providers and re-pointing antennas. If, for any reason, we are not able to obtain sufficient capacity on favorable terms, our business could be significantly jeopardized.

The satellite industry is a highly regulated industry. In the United States, operation and use of satellites requires licenses from the FCC. As a lessee of satellite space, we could in the future be indirectly subject to new laws, policies or regulations or changes in the interpretation or application of existing laws, policies or regulations, any of which may modify the present regulatory environment in the United States of America. While we believe that our corporate partners will be able to obtain all U.S. and other licenses and authorizations necessary to operate effectively, they may not continue to be successful in doing so. Our failure to indirectly obtain some or all necessary licenses or approvals could impose significant additional costs and restrictions on our business, require us to change our operating methods.

Unauthorized Access Could Harm Our Business and Cause Us to Lose Existing Customers, Deter Potential Customers and Harm our Reputation.

Unauthorized access could potentially jeopardize the security of confidential information stored in the computer systems of our customers, which might cause our subscribers to bring liability claims against us and also might deter potential customers from using our services. Since our services allow end users to be connected to the Internet at all times, unauthorized users may have a greater ability to access information stored in end users’ computer systems. Always-on Internet services may give unauthorized users, or hackers, more and longer opportunities to break into end users’ computer or access, misappropriate, destroy or otherwise alter data accessed through the Internet.

We May be Subject to Liability for Information Retrieved and Replicated by Means of Our Services.

Because our customers’ end users will download and redistribute material and we may replicate material or store it on our own network devices in connection with our services, claims may be made against us for defamation, or other theories based on the nature and content of such materials. These types of claims have been brought, and sometimes successfully litigated, against online service providers in the past. Although we carry general liability insurance, our insurance may not cover potential claims of these types, or may not be adequate to indemnify us for all liability that may be imposed. Any imposition of liability that is not covered by insurance or is in excess of insurance coverage could result in a substantial reduction in our revenue and losses over a significant period of time.

We are Heavily Dependent on Our Relationship with Gilat and We May be Significantly Harmed if Gilat is Unable or Fails to Continue to Develop and Sell Us This Technology and Related Equipment.

We will depend on Gilat and its corporate affiliates and suppliers for the satellite technology used to deliver our products and services. We have an agreement with Gilat pursuant to which, if certain conditions are met, Gilat will serve as our exclusive provider of the equipment, technology and services that we will use in our Latin American operations. If we are not able to perform our obligations under our agreements with Gilat, or if Gilat is unable or fails to continue to sell us this equipment and technology under the current terms of our agreement, our ability to operate our Latin American operations would be severely harmed.

Gilat’s principal offices, development facilities and manufacturing and research are located in the State of Israel. Gilat is directly affected by the political, economic and military conditions in Israel. Gilat’s production is dependent upon components imported from outside of Israel and any major hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners could significantly harm Gilat’s ability to meet its supply obligations to us. Recently, Gilat announced a restructuring plan with its major banking creditor and bondholders. The impact of this plan on our relationship with Gilat is unclear. If Gilat does not meet our demand and quality standards for its products, for any reason, or if the terms of our agreements with Gilat change and we decide to pursue other strategic partners, it is unlikely that we would be able to find a replacement supplier without significant harm to our business operations or relationship with Gilat.

Our future growth depends on a number of technological advances Gilat expects to attain over its existing satellite technology and which Gilat has agreed to license to us, such as the

development of software that we expect will enable us to optimize the allocation of end users across our leased satellite capacity and reduce our satellite capacity costs per end user. Furthermore, Gilat has substantial business operations and opportunities apart from our business, and Gilat may develop different business objectives than ours. As a result, situations may arise in which Gilat’s interests diverge from rStar or our other stockholders. For example, we expect to be one of Gilat’s largest customers for their technology, equipment and software. We will seek to purchase from Gilat technology, products, software and equipment necessary to the operations of StarBand Latin America at prices favorable to us, but Gilat will seek to sell those items to us at prices favorable to them. If Gilat does not meet our expectations regarding these technological advances, our ability to successfully operate our business, and our financial condition and profitability, would be harmed.

Our Success Depends Upon the Successful Development of New Services and Features in the Face of Rapidly Evolving Technology.

The market for our current products and services is characterized by rapidly changing technologies, frequent new service introductions and evolving industry standards. Our future success will depend on our ability to adapt to rapidly changing technologies by continually improving the performance, features and reliability of our networks. We may experience difficulties that could delay or prevent the successful development, introduction or marketing of new features, content or network services. In addition, our new enhancements must meet the requirements of our current and prospective sponsors and subscribers and must achieve significant market acceptance. We could also incur substantial costs if we needed to modify our service or infrastructures to adapt to these changes.

Our Dependence on Third Parties for Our Intellectual Property Puts Us at Risk if This Intellectual Property Is Not Properly Protected or Infringes Upon the Rights of Others.

We rely exclusively on third parties like Gilat and Spacenet for most of the intellectual property used in our business. If Gilat or any of our other suppliers fails to adequately protect their intellectual property or is found to be infringing on the intellectual property rights of other parties, our ability to operate our business as expected may, in turn, be harmed.

Infringement claims could materially harm our business and financial condition. From time to time, we may receive notice of claims of infringement of third parties’ proprietary rights. The fields of telecommunications and Internet communications are filled with domestic and international patents, both pending and issued. We may unknowingly infringe such a patent. We may be exposed to future litigation based on claims that our products infringe the intellectual property rights of others, especially patent rights. Someone, including a competitor, might file a suit with little merit, in order to harm us commercially, to force us to re-allocate resources to defending such a claim, or extract a large settlement. In addition, our employees might utilize proprietary and trade secret information from their former employers without our knowledge, even though we prohibit these practices. Any litigation, with or without merit, could be time consuming to defend, result in high litigation costs, divert our management’s attention and resources or cause us to delay deployment of related technology. A jury or judge may decide against us even if we had not in fact infringed. If we lose or are forced to settle, we could be required to remove or replace allegedly infringing technology, to develop non-infringing technology or to enter into royalty or licensing arrangements. These royalty or licensing arrangements, if required, may not be available on terms acceptable to us, or at all.

Possible Infringement of Intellectual Property Rights Could Harm Our Business.

We seek to protect our intellectual property and to respect the intellectual property rights of others. To protect our own intellectual property, we rely on U.S. and international law regarding copyright, patents, trademarks and trade secrets as well as confidentiality agreements with employees, consultants, contractors and business partners. We cannot guarantee that we will succeed in obtaining, registering, policing or defeating challenges to our intellectual property rights, or that we will avoid claims that we are infringing the rights of others.

Despite our efforts to protect our intellectual property, we may be unsuccessful in doing so. We may be unable to obtain patents or register trademarks for a variety of reasons, including a mistaken belief that these items are eligible for intellectual property protection or that we are the entity entitled to this protection, if any. Our copyrights and trade secrets may similarly turn out to be ineligible for legal protection. In addition, parties may attempt to disclose, obtain or use our proprietary information despite, or in the absence of, a confidentiality agreement. Some foreign countries do not protect intellectual property rights to the same extent as the United States of America, and intellectual property law in the United States of America is still uncertain and evolving as applied to Internet-related industries. The status of domain names and the regulatory bodies in charge of them is also unsettled. Any inability to register or otherwise protect our intellectual property rights could seriously harm our business since it could enable competitors to copy important features on our network.

Furthermore, third parties may assert intellectual property infringement claims against us. These claims, possibly including those from companies from which we license key technology for our operations, could result in significant liability, the inability to use key rights and technologies, and the invalidation of our own proprietary rights. In addition, regardless of the outcome, any litigation could be time-consuming, expensive, and distracting of management’s time and attention.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk for changes in interest rates relates primarily to the increase or decrease in the amount of interest income we can earn on our investment portfolio and on the increase or decrease in the amount of interest expense we must pay with respect to our various outstanding debt instruments. The risk associated with fluctuating interest expense is limited, however, to the expense related to those debt instruments and credit facilities that are tied to market rates. We do not use derivative financial instruments in our investment portfolio. We ensure the safety and preservation of our invested principal funds by limiting default risks, market risk and reinvestment risk. We mitigate default risk by investing in high-credit money market funds. A hypothetical increase or decrease in market interest rates by 10% from the market interest rates at September 30, 2002 would not cause the fair value of our cash and cash equivalents or the interest expense paid with respect to our outstanding debt instruments to change by a material amount. Declines in interest rates over time will, however, reduce our interest income while increases in interest rates over time will increase our interest expense. We are also exposed to foreign currency risk as the result of our contracts in Latin America. We attempt to mitigate such risk by entering into contracts denominated in US dollars, however this is not always possible and as such we are exposed to changing exchange rates primarily in Peru, Colombia and Brazil.

ITEM 4. CONTROLS AND PROCEDURES

Within the 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in the Company's periodic SEC filings. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect the Company's controls subsequent to the date of that evaluation and no corrective actions with regard to significant deficiencies and material weaknesses.

PART II.

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On or about October 22, 2001, STM Wireless, Inc. (STM_) filed an action entitled STM Wireless, Inc. v. Gilat Satellite Networks Ltd. et al., Orange County Superior Court Case No. 01 CC13531, by which action STM alleges that the named defendants, including the Company, improperly interfered with STM’s bid to provide telecommunication services to rural areas of Peru. STM’s complaint seeks unspecified damages.

On March 7, 2001, rStar (then known as ZapMe! Corporation) filed action against a software vendor, ON Technology Corporation (“OTC”), by which rStar alleged that OTC breached a software license agreement and defrauded rStar concerning the capabilities of the software. By its complaint, rStar seeks recovery of $390,160 rStar paid to OTC in connection with the software, as well as other damages. On or about March 29, 2001, OTC filed a counterclaim against rStar, alleging that the principal sum of $307,528 is due from rStar for additional license fees, maintenance fees, and professional fees in connection with OTC’s software.

We are not a party to any legal proceedings that we believe could have a material adverse effect on our operating results and financial position. However, we may from time to time become a party to various legal proceedings arising in the ordinary course of business.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

(a) Modification of Constituent Instrument

Not applicable.

(b) Change in Rights

Not applicable.

The Company did not have any sales of unregistered securities during the quarter.

(d) Use of Proceeds

Not applicable

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

Effective as of October 8, 2002, we engaged Kost Forer and Gabbay, a member of Ernst & Young Global as our independent accountant, instead of Ernst & Young LLP, as reported in the Form 8-K we filed on October 16, 2002. The decision to change accountants was approved by the Audit Committee of the Board of Directors of the Company.

ITEM 6. EXHIBITS AND REPORTS ON 8-K

(a) Exhibits

		Description
Exhibit 99.01		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 99.02		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K

On October 23, 2002, we filed a Report on Form 8-K/A amending the Form 8-K of rStar Corporation filed on August 19, 2002, by adding Item 7(a), financial statements of business acquired and Item 7(b), pro forma financial information, in accordance with Item 7 of Form 8-K.

On October 16, 2002 we filed a Report on Form 8-K announcing that effective as of October 8, 2002, we dismissed Grant Thornton LLP as our independent accountant. The decision to change accountants was approved by the Audit Committee of the Board of Directors of the Company. See Item 5 of this Form 10-Q for important information regarding this filing.

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	RSTAR CORPORATION
	(Registrant)
	By:	/s/ SAMER SALAMEH
		Samer Salameh
		Chief Executive Officer (Principal Executive Officer)
	By:	/s/ LIOR KADOSH
		Lior Kadosh
		Interim Chief Financial Officer
		(Principal Financial Officer)
Date: November 27, 2002

CERTIFICATIONS

I, certify that:

1. I have reviewed this quarterly report on Form 10-Q of September 30, 2002;

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

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

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

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

(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

(c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

(a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

/s/ SAMER SALAMEH		Date November 27, 2002
Samer Salameh,
Chief Executive Officer

I, certify that:

1. I have reviewed this quarterly report on Form 10-Q of September 30, 2002;

(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

(c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

/s/ LIOR KADOSH		Date November 27, 2002
Lior Kadosh,
Interim Chief Financial Officer

Filing Compare · RSTAR CORP