10-Q 1 t10q-1126.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 SEPTEMBER 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 [X] No [ ] Indicate by check mark whether the registrant is an accelerated filed as defined in Rub 12b-2 of the Act. Yes [ ] No [X] The number of shares of the issuer's Common Stock outstanding as of October 31, 2003 was 104,529,864. 1

7 RSTAR CORPORATION AND ITS SUBSIDARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 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 (the "Company" or "rStar"), 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 nine months ended September 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 in the Company's Annual Report on Form 10-K for the year ended December 31, 2002 (File No. 000-27029). Operating results for the three and nine months ended September 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 acquired StarBand Latin America 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. ("StarBand Latin America"), 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. On September 30, 2003 the parent entity of certain subsidiaries was transferred to rStar in accordance with the Closing agreement. The primary assets of the entity were the investments in those subsidiaries. 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 Latin America as of and for the year ended December 31, 2001 and for the quarters ended September 30, 2002 since Gilat achieved common control over StarBand Latin America 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 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. 8 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 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-To-Home Florida Inc. and (vii) intercompany agreements to provide services for subsidiaries of Gilat Satellite Networks Ltd. ("Gilat"). In addition, certain expenses were allocated from rStar to 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 The Company has debt obligations to Gilat and various Gilat controlled entities. These amounts include certain assets and liabilities (described below) that Gilat was unable to transfer to rStar in the StarBand Latin America acquisition 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 of the StarBand Latin America acquisition, 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 a change to amounts due to related parties. Debts in excess of excluded assets have been contributed to equity. Starband Latin America 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 to Gilat, once the assets due back to Gilat have been exhausted an agreement for the repayment of this related party debt will be established. Gilat and its affiliates charged rStar and its subsidiaries for equipment, space segment, management services and related costs, totaling $2.9 million and $2.0 million for the three months ended September 30, 2003 and 2002, respectively. During the nine months ended September 30, 2003 and 2002 such charges amounted to $ 7.5 million and $ 7.8 million, respectively. Additionally, the Company entered into following related party agreements: o a representative agreement with a Gilat affiliate pursuant 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 nine month ended September 30, 2003 was $2.2 million. o a representative agreement with a Gilat affiliate pursuant 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 nine month ended September 30, 2003 was $0.9 million. o a software license agreement with a Gilat affiliate pursuant to which 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 nine month ended September 30, 2003 was $0.6 million. o engineering, procurement and construction management agreements with two Gilat affiliates pursuant to which the Company will provide services to the Gilat affiliates. The 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 nine month ended September 2003 was $3.1 million. o a settlement agreement and general release with a Gilat affiliate 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 the nine month ended September 30, 2003 was $2.0 million. 9 NOTE 2: MAJOR CUSTOMERS AND SUPPLIERS A significant portion of the Company's revenues comes from services provided to Gilat (see Note 1 "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 $504,000 and $ 6.5 million in the three months ended September 30, 2003 and 2002, respectively. For the nine months ended September 30, 2003 such revenues amounted to $ 9.4 million and $ 16.0 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 "Customer and Geographic Information" for details regarding major customers. Revenues from StarOne which consist of sales of equipment under long-term capital leases was $0 for the three months ended September 30, 2003 and 2002 and $9.8 million and $0 for the nine months ended September 30, 2003 and 2002, respectively. Revenues from Gilat affiliates amounted to $27,000 and $6.8million in the three months and nine months ended September 30, 2003, respectively, and $0 for the three and nine months ended September 30, 2002. 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 1, "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 Gilat fails to deliver the necessary equipment and services, the Company may be required to seek an alternative source 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 1"Related Party 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 10-K for the year ended December 31, 2002 (File No. 000-27029) are those that depend most heavily on these judgments and estimates. As of September 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. NOTE 4: SHAREHOLDERS' EQUITY a. Stock options plans The following table summarizes information about stock options outstanding as of September 30, 2003:

In January 2003 the Company granted options to four non-Gilat related and non-employee directors. Each such 10 director was granted 200,000 stock options, to vest annually over a four-year period so long as such optionee remains a director of the Company. The option price is $ 0.26 per share, which is equal to the fair market value on the date of the grant. In August 2003, the compensation committee approved the grant of 2.8 million stock options to the CEO in accordance with the terms in his employment agreement. The options vest monthly over a four-year period beginning on the date of his employment, November 4, 2002. The exercise price for the options p is $0.16. The options were treated under APB 25 as variable plan and compensation expense of $692,000 has been recorded in the three months and nine months ended September 30, 2003 using the accelerated method of accounting for incentive stock options. Total deferred compensation $ 1,241,815 Amortization of deferred compensation in the nine month period ended September 30, 2003 691,474 ------------- Unamortized deferred compensation $ 550,341 ============= 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 1.09 and 0.82 for 2003 and 2002, respectively; and a weighted-average expected life of the option of 3.5 years for 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, "Basis of Presentations" 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:

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

c. The Group's long-lived assets are located in the following countries: Dollars in thousands SEPTEMBER 30, DECEMBER 31, 2003 2002 --------------- -------------- Peru $5,766 $6,918 United States 4,260 5,335 Colombia 3,351 3,341 Brazil 193 79 --------------- -------------- $13,570 $15,673 =============== ============== NOTE 6: NET INCOME LOSS PER SHARE Basic loss per share is computed based on the weighted average number of shares of common stock outstanding during each period. Diluted loss per share is computed based on the weighted average number of shares of common stock outstanding during each period, plus dilutive potential shares of common stock 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): 12

For the three months ended September 30, 2003 and the three and nine months ended September 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 nine months ended September 30, 2003 we have excluded all convertible preferred stock, warrants to purchase common and preferred convertible stock. We have included 1,667,015stock options that were outstanding and exercisable with an average exercise price of $0.32 14 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 CONTINUED INTEGRATION OF THE STARBAND LATIN AMERICAN BUSINESS, AMONG OTHER RISKS. o THE LAUNCH AND CONSUMMATION OF A TENDER OFFER FOR OUR OUTSTANDING COMMON STOCK BY GILAT OR A DECISION BY GILAT TO ELIMINATE THE PUBLIC INTEREST IN THE COMPANY THROUGH OTHER MEANS. 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 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. In accordance with the terms of the acquisition agreement between Gilat and rStar for the StarBand Latin America acquisition, 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. On September 30, 2003 the parent entity of certain subsidiaries was transferred to rStar in accordance with the Closing agreement. Under the acquisition agreement, StarBand Latin America entered into a master services and supply agreement with Gilat pursuant to which we receive specified services and products from Gilat necessary to conduct our business in Latin America. See "Master Service and Supply Agreement" incorporated by reference in the Company's Annual Report of Form 10-K for the year ended December 31, 2002. In connection with our change in business focus, we underwent significant reductions-in-force during 2002. These actions, combined with attrition, reduced our headcount approximately 85% from 120 employees at January 1, 2002 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 $2.2 million for the nine months ended September 30, 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 increased our head count to approximately 180 employees as of October 31, 2003. In addition, Gilat has provided headquarters personnel during the transition period. 15 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. Gross receivable from leases under capital lease at September 30, 2003 was $ 12.4 million and a net present value of $9.7. The average interest used to discount the leases is 10.8%. 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. 16 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 nine months ended September 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 Report on 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:

16 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 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 nine months ended September 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 have provided and continue to provide certain services under such contracts (See Note 1, "Related Party Transactions". PRODUCTS Revenues from product sales decreased $1.9 million (63%) from $3.0 million for the three months ended September 30, 2002 to $1.1 million for the three months ended September 30, 2003. This decrease in revenue was attributable mainly to the completion of the implementation phase of the Peru projects in the six-month period ended June 30, 2003. The current sales for the three months ended September 30, 2003 relates primarily to the completion of the installation of equipment in a government project in Colombia. Revenues from product sales increased $10.2 million (115%) from $8.9 million for the nine months ended September 30, 2002 to $19.1 million for the nine months ended September 30, 2003. This increase in revenue was attributable mainly to the sale of equipment totaling $9.8 million to StarOne in Brazil under long-term capital leases and the completion of the implementation phase of the Peru projects during the nine months ended September 30, 2003. As the Peru implementation was completed during the six months ended June 30, 2003 and we did not win new bids in 2003. We expect revenue will continue to decline related to bids. SERVICES Revenues from services decreased $852,000 (18%) from $4.6 million for the three months ended September 30, 2002 to $3.8 million for the three months ended September 30, 2003. The decrease is a result of the decrease in installation services in Peru provided in 2002 off set by increases in network traffic in 2003. Revenues from services increased $2.1 million (14%) from $14.7 million for the nine months ended September 30, 2002 to $16.8 million for the nine months ended September 30, 2003. This increase is primarily the result of services provided to Gilat (see Note 1, "Related Party Transactions") and an increase in network traffic off set by decreases in installation revenue in Peru. COST OF REVENUES Cost of revenues related to products consists of the cost of equipment for the government projects noted above and for other 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 of 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. PRODUCTS For the three months ended September 30, 2003, cost of revenues related to products decreased $868,000 66% from $1.3 million for the three months ended September 30, 2002 to $455,000 for the three months ended September 30, 2003. This decrease was attributable to a corresponding decrease in product sales revenue in 2003. The margin on product sales for the three months ended September 30, 2003 is consistent with the three months ended September 30, 2002. For the nine months ended September 30, 2003, cost of revenues related to products increased $3.1 million (72%) from $4.3 million for the nine months ended September 30, 2002 to $7.4 million for the nine months ended September 30, 2003. The increase is attributable to a corresponding increase in product sales revenue. The margin on product sales is higher in 2003, because margins vary based on the type of customer. 17 SERVICES For the three months ended September 30, 2003, cost of revenues from services increased $836,000 (17%) from $4.9 million for the three months ended September 30, 2002 to $5.7 million for the three months ended September 30, 2003. The cost of services increased as a result of a higher cost of maintaining the entire installed network, an increase in insurance costs and other maintenance costs. Other than installation services, cost of revenues consisted primarily of operational expenses for our existing networks in Colombia and Peru. For the nine months ended September 30, 2003, cost of revenues from services decreased $3.7 million (20%) from $18.1 million for the nine months ended September 30, 2002 to $14.4 million for the nine months ended September 30, 2003. The decrease is related to the additional revenues related to services provided to Gilat with lower cost of services compared to the prior periods and therefore higher margins on those services. 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 September, 2003 and 2002 were approximately $3.7 million and $5.8 million, respectively. The 2002 amount includes the cost of severance for the prior management of rStar (before the Gilat acquisition in August 2002) of $1.7 million as well as other costs associated with these personnel. During the nine months ended September 30, 2003, selling, marketing, general and administrative decreased $4.9 million (37%) from $8.4 million for the nine months ended September 30, 2003 to $13.3 million for the nine months ended September 30, 2002. The nine months ended September 30, 2002 included $2.2 million of severance for rStar employees that were terminated after the acquisition and other employee related costs. Decreases were offset by an increase in compensation expense of $692,000 for the three months ended September 30, 2003 related to stock options issued to the CEO in August of 2003. FINANCIAL INCOME (EXPENSES), NET Financial expenses include interest income, interest expenses and foreign currency gains and losses. Financial income (expenses) was $553,000 and $(155,000) during the three months ended September 30, 2003 and 2002 respectively. The increase was the result of an increase in interest income related to the capital lease negotiated in the end of the second quarter of 2003, a reduction in interest expenses relating to the expiration of significant capital lease obligations during 2002 and a conversion of debt to equity with a related party lease, with Spacenet Inc., a wholly owned subsidiary of Gilat. Financial income (expenses) was $237,000 and ($727,000) during the nine months ended September 30, 2003 and 2002 respectively. The increase was the result of foreign exchange losses in Brazil and Colombia in 2002, an increase in interest income related to the capital lease negotiated in the end of the second quarter of 2003, a reduction in interest expenses relating to the expiration of significant capital lease obligations during 2002 and a conversion of debt to equity with a related party lease, with Spacenet Inc 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 September 30, 2002, approximately $227,000 of costs was incurred relating the AutoNetworks business. For the nine months ended September 30, 2002 approximately $1.7 million of costs were incurred relating to the AutoNetworks business. LIQUIDITY AND CAPITAL RESOURCES OPERATING ACTIVITIES. For the nine months ended September 30, 2003, net cash used in operating activities was approximately $2.6 million consisting of approximately $4.3 million of net income offset by non-cash charges of approximately $3.1 million relating to depreciation. In addition, trade receivables increased by approximately $2.4 million, and other receivables and prepaid expenses (including long-term receivables) increased by approximately $ 12.3 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 increased our debt with Gilat by $752,000 and increased our inventory by approximately $2.3 million. This compares to cash used in the nine months ended September 30, 2002 of approximately $12.5 million. In the nine months ended September 30, 2002 cash was primarily used to fund net losses generated by the Company. INVESTING ACTIVITIES. During the nine months ended September 30, 2003 we spent approximately $601,000 on investing activities, which was attributable to $1.8million in fixed asset purchases and a reduction in restricted cash from our various activities in Peru and Colombia of approximately $851,000. FINANCING ACTIVITIES. During the nine months ended September 30, 2003 we spent approximately $ 1.3 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 agreed to pay a special distribution to our minority shareholders under certain circumstances. We agreed that, in the event that the StarBand Latin America business, as defined, did not achieve certain net 18 income targets agreed to by the parties during the years ended June 30, 2003 and June 30, 2004, rStar stockholders of record as of June 30, 2003 and 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. The net applicable income for the StarBand Latin America business for the period ended June 30, 2003 was greater than of $2.5 million, therefore no payment was due for this period. Additionally, 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. 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 from 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 will 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 twelve 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. As of September 30, 2003, our short and long term obligations were as follows:

OFF BALANCE SHEET ARRANGEMENTS At September 30 2003, the Company was 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. The maximum potential amount of future payments that our subsidiaries could be required to make under guarantees at September 30, 2003 is $30.6 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 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 CHANGED ON APRIL 15, 2003, AND WE CANNOT BE SURE TO WHAT EXTENT, IF AT ALL, THIS WILL AFFECT US. As of September 30, 2003, 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 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. GILAT ANNOUNCED THAT THEY ARE CONTEMPLATING PURCHASING ALL OF THE OUTSTANDING SHARES OF THE COMPANY. THIS ANNOUNCEMENT COULD AFFECT THE PRICE OF OUR SHARES CURRENTLY AND IN THE FUTURE. Gilat announced on September 18, 2003 that it is contemplating a purchase of all outstanding shares of common stock of the Company not already owned by Gilat at a price not yet determined but expected to be between $0.60 and $0.70 per share in cash. This press release indicated Gilat's interest in pursuing such a tender offer, but no such offer has yet commenced. It is currently anticipated that the purchase would be made through a tender offer, subject to customary conditions, in accordance with the rules of the Securities and Exchange Commission. In its press release Gilat also indicated that, if it holds at least 90 percent of the outstanding rStar shares following completion of the offer, it may effect a "short-form" merger of rStar with a Gilat subsidiary which would cash out the unaffiliated public stockholders of the Company at the tender offer price. After consummation of such a tender offer and short-form the unaffiliated public stockholders would no longer have any interest in the Company other than their appraisal rights under Delaware law with respect to the consideration received by them in the short-form merger. Gilat could determine not to proceed with the offer if in its sole judgment changes in economic, business or market conditions make the offer unadvisable to Gilat. Further, as discussed above, Gilat holds a substantial majority of our shares of common stock, and currently has the ability to call a special meeting of the Company's stockholders. In addition to pursuing a tender offer as indicated and described above, Gilat could consider a cash-out merger, open market or other purchases of our stock or a reverse stock split in order to take rStar private. In any such scenario, the interests of our unaffiliated public stockholders could be eliminated. 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 20 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 we may not successfully overcome these risks. WE HAVE INCURRED SUBSTANTIAL LOSSES AND ANTICIPATE CONTINUED LOSSES. We incurred net losses of approximately $213 million from our inception through September 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 in the six months ended June 30, 2003 achieved profitability and even though we have achieved profitability we have not maintained that profitability in the three months ended September 30, 2003, and 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 However Gilat is not obligated to buy such services from the Company. 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 "Managements Discussion and Analysis of Financial Condition-Liquidity and Capital Resources." WE MAY SUFFER FOREIGN EXCHANGE RATE LOSSES. A portion of our 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. Because all of our revenues currently come from business outside of the United States, we have substantial we have substantial 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. WE HAVE LIMITED PREVIOUS EXPERIENCE IN THE LATIN AMERICAN MARKET AND OUR ABILITY TO BE SUCCESSFUL IN THAT MARKET IS UNCERTAIN. Since the closing date of the StarBand Latin America acquisition in August of 2002, we have expanded our business operations into the delivery of satellite-based telephony and Internet access services in Latin America. Because our acquisition of StarBand Latin America was relatively recent and prior to such acquisition we had no operations in Latin America, we have limited 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. 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 21 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. We have recently and significantly changed our business model and strategy when we acquired StarBand Latin America in August 2002. 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 further: (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, 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 entail many risks, including some that we may not have contemplated. It is difficult to assess the material adverse effects from these interrelationships... 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. 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 Gilat affiliates' 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 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 22 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 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. In 2002 NASDAQ delisted our common stock from the NASDAQ Stock Market because our stock has failed to close above a minimum bid price of $1.00 for an extended period of time. We have engaged in extensive correspondence with NASDAQ about the potential for the delisting of 23 our common stock from the NASDAQ SmallCap Market due to our failure to comply with the NASDAQ's 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 that could render the reverse stock split unnecessary. In March, May and August, the NASDAQ Listing Qualifications Panel informed us that it 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. This 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. A reverse stock split, if required, 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. 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 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 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. 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 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. 24 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 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. 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 25 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 has required and will continue to 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 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. 26 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, 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. 27 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 September 30, 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 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 (A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES Based on their evaluation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and l Chief Financial Officer are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, of and include controls and procedures designed to ensure that information required to be disclosed by us in such reports is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. (B) CHANGES IN INTERNAL CONTROLS There were no changes that occurred during the fiscal quarter covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. 28 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 was settled, and the lawsuit was dismissed with prejudice. 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 No matters were submitted to a vote of our security holders through the solicitation of proxies or otherwise during the third quarter ended September 30, 2003. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON 8-K (A) EXHIBITS 31.1 Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13-a14 and 15d-14. 31.2 Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14 and 15d-14. 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* * In accordance with SEC Release 33-8238, Exhibits 32.1 and 32.2 are being furnished and not filed. (B) REPORTS ON FORM 8-K We filed a Current Report on Form 8-K dated August 15, 2003 announcing audited financial statements for a portion of our business in order to determine whether a special distribution to our shareholders was required. 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. 29 RSTAR CORPORATION (Registrant) By: /s/ SAMER SALAMEH Samer Salameh CHIEF EXECUTIVE OFFICER (PRINCIPAL EXECUTIVE OFFICER) By: /s/ Doron Gefen Doron Gefen Chief Financial Officer (PRINCIPAL FINANCIAL OFFICER) Date: November 14 , 2003 30 CERTIFICATIONS I, certify that: 1. I have reviewed this quarterly report on Form 10-Q of rStar Corporation; 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-158(e) and 15(e) for the registrant and we have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report (the based on such evaluation; and (c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. /s/ SAMER SALAMEH Date November 14, 2003 Samer Salameh, Chief Executive Officer 31 I, certify that: 1. I have reviewed this quarterly report on Form 10-Q of rStar Corporation; 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-158(e) and 15(e) for the registrant and we have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report (the based on such evaluation; and (c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. /s/ DORON GEFEN Date November 14, 2003 Doron Gefen Chief Financial Officer 32

RSTAR CORP 10-Q