As filed with the Securities and Exchange Commission on April 1, 2009

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# UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

# FORM 20-F

|o | REGISTRATION
STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------------

# OR

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

# For the fiscal year
ended December 31, 2008

# OR

|o | TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

# OR

|o | SHELL
COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | -------------------------------------------------------------------------------------------

# For the transition
period from __________ to __________

# Commission file number
0-30862

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CERAGON NETWORKS LTD.(Exact Name of Registrant as Specified in Its Charter)

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Israel(Jurisdiction of Incorporation or Organization)

24 Raoul Wallenberg
Street, Tel Aviv 69719, Israel(Address of Principal
Executive Offices)

Norman Kotler, (+972) 3-645-5733(tel.), (+972) 3-645-5499 (fax), 24 Raoul Wallenberg Street, Tel Aviv 69719, Israel(Name, Telephone, E-mail and/or Facsimile Number and Address of Company Contact Person)

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Securities registered or to be
registered pursuant to Section 12(b) of the Act:

|                                    |                                     
|----------------------------------- | ------------------------------------
|
|
|
|
|Title of Each Class                 | Name of Exchange of Which Registered
|Ordinary Shares, Par Value NIS 0.01 | Nasdaq Global Market                



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Securities registered or to be registered pursuant to Section 12(g) of the Act:  None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:  None

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Indicate the number of outstanding
shares of each of the issuers classes of capital or common stock as of the close of
the period covered by the annual report: 35,586,701 Ordinary Shares, NIS 0.01 par value.

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

Yes o      No  x

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

Yes o      No  x

Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:

Yes x No o

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

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

Indicate by check mark which basis of
accounting the registrant has used to prepare the financial statements included in this
filing:

U.S. GAAP x

International Financial Reporting Standards as issued by the International Accounting Standards Board o

Other o

If Other has been checked
in response to the previous question, indicate by check mark which financial statement
item the registrant has elected to follow:

Item 17  o   Item 18  o

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

Yes  o No   x



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# TABLE OF CONTENTS

|         |                                                                              | Page
|-------- | ---------------------------------------------------------------------------- | ----
|
|
|
|
|PART I   |                                                                              | 1   
|ITEM 1.  | Identity of Directors, Senior Management and Advisers                        | 1   
|ITEM 2.  | Offer Statistics and Expected Timetable                                      | 1   
|ITEM 3.  | Key Information                                                              | 1   
|ITEM 4.  | Information on the Company                                                   | 19  
|ITEM 4A  | Unresolved Staff Comments                                                    | 26  
|ITEM 5.  | Operating and Financial Review and Prospects                                 | 27  
|ITEM 6.  | Directors, Senior Management and Employees                                   | 40  
|ITEM 7.  | Major Shareholders and Related Party Transactions                            | 57  
|ITEM 8.  | Financial Information                                                        | 59  
|ITEM 9.  | The Offer and Listing                                                        | 60  
|ITEM 10. | Additional Information                                                       | 62  
|ITEM 11. | Quantitative and Qualitative Disclosures About Market Risk                   | 73  
|ITEM 12. | Description of Securities Other than Equity Securities                       | 73  
|PART II  |                                                                              | 73  
|ITEM 13. | Defaults, Dividend Arrearages and Delinquencies                              | 73  
|ITEM 14. | Material Modifications to the Rights of Security Holders and Use of Proceeds | 73  
|ITEM 15. | Controls and Procedures                                                      | 74  
|ITEM 16. | [RESERVED]                                                                   | 75  
|ITEM 16A | Audit Committee Financial Expert                                             | 75  
|ITEM 16B | Code of Ethics                                                               | 75  
|ITEM 16C | Principal Accountant Fees and Services                                       | 75  
|ITEM 16D | Exemptions from the Listing Standards for Audit Committees                   | 76  
|ITEM 16E | Purchases of Equity Securities by the Issuer and Affiliated Purchasers       | 76  
|ITEM 16F | Change in Registrants Certifying Accountant                                 | 76  
|ITEM 16G | Corporate Governance                                                         | 77  
|PART III |                                                                              | 77  
|ITEM 17. | Financial Statements                                                         | 77  
|ITEM 18. | Financial Statements                                                         | 77  
|ITEM 19. | Exhibits                                                                     | 77  

- i -

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# INTRODUCTION

# Definitions

In this annual report, unless the
context otherwise requires:

| |  | references to Ceragon,
the Company, us, we and our refer to
Ceragon Networks Ltd. (the Registrant), an Israeli company, and its
consolidated subsidiaries;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | references to ordinary
shares, our shares and similar expressions refer to the
Registrants Ordinary Shares, NIS 0.01 nominal (par) value per share;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | references to dollars,
U.S. dollars and $ are to United States Dollars;
| | - | -----------------------------------------------------------------------------

| |  | references to shekels and
NIS are to New Israeli Shekels, the Israeli currency;
| | - | -----------------------------------------------------------------------------------

| |  | references to the Companies
Law are to Israels Companies Law, 5759-1999; and
| | - | -------------------------------------------------------------------------------

| |  | references to the SEC are to
the United States Securities and Exchange Commission.
| | - | ------------------------------------------------------------------------------------

# Cautionary Statement
Regarding Forward-Looking Statements

This
annual report includes certain statements that are intended to be, and are hereby
identified as, forward-looking statements for the purposes of the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. We have based these
forward-looking statements on our current expectations and projections about future
events.

Forward-looking
statements can be identified by the use of forward-looking terminology such as
may, will, expect, anticipate,
estimate, continue, believe or other similar
expressions, but are not the only way these statements are identified. These statements
discuss future expectations, plans and events, contain projections of results of
operations or of financial condition or state other forward-looking
information. When a forward-looking statement includes an underlying assumption, we
caution that, while we believe the assumption to be reasonable and make it in good faith,
assumed facts almost always vary from actual results, and the difference between a
forward-looking statement and actual results can be material. Forward-looking statements
may be found in Item 4: Information on the Company and Item 5: Operating
and Financial Review and Prospects and in this annual report generally. Our actual
results could differ materially from those anticipated in these statements as a result of
various factors, including all the risks discussed in Risk Factors and other
cautionary statements in this annual report. All of our forward-looking statements are
qualified by and should be read in conjunction with those disclosures. Except as may be
required by applicable law, we undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future events or
otherwise. In light of these risks, uncertainties, and assumptions, the forward-looking
events discussed in this annual report might not occur.

# PART I

|ITEM 1. |  | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
|------- |  | -----------------------------------------------------

Not applicable.

|ITEM 2. |  | OFFER STATISTICS AND EXPECTED TIMETABLE
|------- |  | ---------------------------------------

Not applicable.

|ITEM 3. |  | KEY INFORMATION
|------- |  | ---------------

# Selected Financial Data

Thefollowingtables present our consolidated statement of operations and balance
sheet data for the periods and as of the dates indicated. The selected financial data have
been derived from our audited historical financial statements for each of the years from
2004 to 2008. The selected consolidated statement of income data for the years 2006, 2007,
and 2008, and the selected consolidated balance sheet data at December 31, 2007 and 2008,
have been derived from our audited consolidated financial statements set forth in
Item 18  Financial Statements. The selected consolidated statement of
income data for the years 2004 and 2005, and the selected consolidated balance sheet data
at December 31, 2004, 2005 and 2006, has been derived from our previously published
audited consolidated financial statements, which are not included in this Annual Report on
Form 20-F. We prepare our consolidated financial statements in U.S. dollars and in
accordance with United States Generally Accepted Accounting Principles (U.S.
GAAP). The selected consolidated financial data set forth below should be read in
conjunction with Item 5 of this annual report entitled Operating and Financial
Review and Prospects and our consolidated financial statements and the notes to
those financial statements included elsewhere in this annual report.

1

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|                                           | Year ended December 31,
|------------------------------------------ | -----------------------
|
|
|
|
|Consolidated Statement of Operations Data: |                        
|Revenues                                   |                        
|Cost of revenues 2,3                       |                        
|                                           |                        
|                                           |                        
|Gross profit                               |                        
|                                           |                        
|Operating expenses:                        |                        
|Research and development                   |                        
|Less: grants and participations            |                        
|                                           |                        
|                                           |                        
|Research and development, net              |                        
|Selling and marketing                      |                        
|General and administrative                 |                        
|                                           |                        
|Expense in respect of settlement reserve   |                        
|                                           |                        
|                                           |                        
|Total operating expenses                   |                        
|                                           |                        
|                                           |                        
|Operating income (loss)                    |                        
|Financial income, net                      |                        
|Other income                               |                        
|                                           |                        
|                                           |                        
|Income (loss) before taxes                 |                        
|                                           |                        
|Tax benefit                                |                        
|                                           |                        
|                                           |                        
|Net income (loss)                          |                        
|                                           |                        
|                                           |                        
|Basic net earnings (loss) per share        |                        
|                                           |                        
|                                           |                        
|Diluted net earnings (loss) per share      |                        
|                                           |                        
|                                           |                        
|Weighted average number of shares          |                        
|used in computing basic earnings           |                        
|(loss) per share                           |                        
|                                           |                        
|                                           |                        
|Weighted average number of shares          |                        
|used in computing diluted earnings         |                        
|(loss) per share4                          |                        
|                                           |                        

|(1) | The
deferred stock-based compensation expenses previously presented for the
               years 2004-2005 in a separate line item were reclassified in the relevant
               expense line.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | In
2005, the amount includes $7,082 related to a write-off of inventories and
               $390 related to a write-off of long-term receivables.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | In
2006, the amount includes a one-time charge of $10,444 related to an
               agreement with the Office of the Chief Scientist to terminate our grant
program.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | In
2005 and 2006, all outstanding share options have been excluded from the
               calculation of diluted net loss per share because all these securities are
               antidilutive for the periods presented.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2

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|                                        | At December 31,
|--------------------------------------- | ---------------
|
|
|
|
|Consolidated Balance Sheet Data:        |                
|Cash and cash equivalents, short and    |                
|long term bank deposits, short and long |                
|term marketable securities              |                
|Working capital                         |                
|Total assets                            |                
|Total long term liabilities             |                
|Shareholders' equity                    |                

# Risk Factors

The
following risk factors, among others, could affect our actual results of operations and
cause our actual results to differ materially from those expressed in forward-looking
statements made by us. These forward-looking statements are based on current expectations
and we assume no obligation to update this information. You should carefully consider the
risks described below, in addition to the other information contained elsewhere in this
annual report. The following risk factors are not the only risk factors facing our
company. Additional risks and uncertainties not presently known to us or that we currently
deem immaterial may also affect our business. Our business, financial condition and
results of operations could be seriously harmed if any of the events underlying any of
these risks or uncertainties actually occur. In that event, the market price for our
ordinary shares could decline.

Risks Relating to Our
Business

The current economic and
financial crisis may have a material adverse effect on our results.

The crisis of the financial and
credit markets worldwide in the second half of 2008 has led to an economic slowdown
worldwide, and the outlook for 2009 is uncertain. A continuation or worsening of
unfavorable economic conditions, including the ongoing credit and capital markets
disruptions, could have an adverse impact on our business, operating results or financial
condition in a number of ways. For example, our preliminary results for the first quarter
of 2009 indicate lower revenues and net income than in both the first and last quarters of
2008. We may experience further declines in revenues, profitability and cash flows as a
result of reduced orders, delays in receiving orders or in the completion of projects,
delays or defaults in payment or other factors caused by the economic problems of our
customers and prospective customers. We may experience supply chain delays, disruptions or
other problems associated with financial constraints faced by our suppliers and
subcontractors. In addition, changes and volatility in the equity, credit and foreign
exchange markets and in the competitive landscape make it increasingly difficult for us to
predict our revenues and earnings into the future. Currently, we lack of short-term
visibility as customers are focused on maintaining flexibility, reducing inventory and
conserving their cash.

We face intense competition
from other wireless equipment providers. If we fail to compete
effectively, our business, financial condition and results of operations would be materially adversely affected.

The
market for wireless equipment is rapidly evolving, fragmented, highly competitive and
subject to rapid technological change. Increased competition in the wireless equipment
market could result in reduced demand for our products, price reductions and reduced gross
margins, any of which could seriously harm our business and results of operations. Our
primary competitors include Harris Stratex Networks, Inc., Huawei Technologies Co., Ltd.,
L.M. Ericsson Telephone Company, NEC Corporation (NEC) and Nokia Siemens Networks B.V.
(NSN). In addition to these primary competitors, a number of other communications
equipment suppliers, including Alcatel-Lucent, DragonWave Inc., Nera Networks AS, SIAE
Microelectronica S.p.A. and ZTE Corporation, offer or are developing products that compete
with our products.

3

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Most
of our principal competitors are substantially larger than we are and have longer
operating histories and greater financial, sales, marketing, distribution, technical,
manufacturing and other resources than we have. They also have greater name recognition
and a larger customer base than we have. Many of these competitors have well-established
relationships with our current and potential customers and have extensive knowledge of our
target markets. As a result, our competitors may be able to respond more quickly to
evolving industry standards and changes in customer requirements, or to devote greater
resources to the development, promotion and sale of their products than we can. In
addition, our competitors, especially those from China, may be able to offer customers
financing that would increase the attractiveness of their products in comparison to ours.

Additionally,
the telecommunications equipment industry has experienced significant consolidation among
its participants, and we expect this trend to continue. In mid-2006, Nokia and Siemens
formed a joint venture to merge the Networks Business Group of Nokia and the
carrier-related operations of Siemens into NSN. NSN began operations in April 2007. Other
examples are the mergers of Alcatel and Lucent and of the wireless divisions of Harris and
Stratex Networks, and the acquisition by Ericsson of Marconi. These consolidations have
increased the size and thus the competitive resources of these companies. In the future,
current and potential competitors may make strategic acquisitions or establish cooperative
relationships among themselves or with third parties that may allow them to increase their
market share and competitive position.

We
expect to face increasing competitive pressures in the future. If we are unable to compete
effectively, our business, financial condition and results of operations would be
materially adversely affected.

Global competition and
current market conditions, as well as an increase in the concentration of our business
in India and other parts of Asia, have resulted in downward pressure on the prices for our products,
which could result in reduced revenues, gross margins and profitability.

We
operate in the wireless equipment market, which is characterized by vigorous, worldwide
competition for market share and by rapid technological development. These factors have
resulted in aggressive pricing practices and downward pricing pressures, as well as
growing competition from both start-up companies and well-capitalized telecommunication
systems providers. Moreover, competition for larger equipment orders is particularly
intense since the number of large equipment orders in any year is limited. Consequently,
we generally experience greater pricing pressure when we compete for larger orders as a
result of this increased competition and demand from purchasers for greater volume
discounts. As an increasing portion of our revenues is derived from large orders, we
believe that our business will be more susceptible to these pressures.

Also,
in recent years we have increased sales of our products in India and other parts of Asia
in response to the rapid build-out of cellular networks in those regions. For the years
ended December 31, 2007 and 2008, 42% and 52%, respectively, of our revenues were earned
in the Asia/Pacific region. Sales of our products in these markets are generally at lower
gross margins in comparison to other regions.

These
factors have resulted in a decrease in our gross margins from 36% for the year ended
December 31, 2007 to 33% for the year ended December 31, 2008.

If
we are unable to effectively respond to these pricing pressures, our revenues, gross
margins and profitability could be materially reduced, and our gross margins could
continue to be reduced.

We  will not be
able to sustain our recent revenue growth rate during the current economic crisis and may not be able to
regain our recent rate of growth in future periods, which may reduce our share price.

Our revenues have grown rapidly over
the last several years. Our revenues for the years ended December 31, 2006, 2007 and 2008
were $108.4 million, $161.9 million and $217.3 million, respectively. You should not rely
on our revenue growth in any prior quarterly or annual period as an indication of our
future revenue growth. The preliminary results for the first quarter of 2009 indicate that
we will not sustain our recent growth rate in the short term and may not be able to regain
this rate of growth in future periods. We expect revenues for the first quarter of 2009 to
be lower than in the first and last quarters of 2008. If we are unable to maintain
adequate revenue growth, our share price may decline. You must consider our business and
prospects in light of the risks and difficulties we encounter as a rapidly growing
technology company.

4

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---

We have a history of
operating and net losses. We may not operate profitably in the future.

We have incurred operating and net
losses in almost every fiscal year from our inception, other than 2004, 2007 and 2008, and
we may incur losses in the future. For the years ended 2005 and 2006, we reported net
losses of $3.8 million and $5.5 million, respectively. Our results of operations are
likely to decline in 2009. Our preliminary estimate of net income for the first quarter of
2009 is that it will be lower than for the first and last quarters of 2008. As of December
31, 2008, our accumulated deficit was $94.6 million. While we achieved net income of
approximately $26.0 million in the year ended December 31, 2008, we cannot assure you that
we will operate profitably in the future or that our profitability will not decline. If we
do not sustain our profitability, our share price could decline.

Depending on the impact
on our business of the current economic crisis, we may face problems in managing any
decline in our business.

If the current economic and financial
crisis continues to have an adverse impact on the demand for products or their
profitability, we may face difficulties in managing a decline in our business. Our success
in handling a contraction of our business will depend on our ability, among other things,
to:

| |  | develop
efficient forecast methods for evaluating the prospective quantity of products that will
be ordered by our customers;
| | - | -----------------------------------------------------------------------------------------------------------------------------

| |  | control
inventories of components ordered by our contract manufacturers required to meet actual
demand, including but not limited to handling the effects of excess inventories
accumulated by such manufacturers;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | reduce
the costs of manufacturing our products;
| | - | -----------------------------------------------

| |  | continue
to collect receivables from our customers in full and in a timely manner; and
| | - | --------------------------------------------------------------------------------------

| |  | properly
balance the size and capabilities of our workforce.
| | - | ------------------------------------------------------------

If
we are unable to manage a decline in business, we could fail to manage the costs
associated with all aspects of our business, which would have a material adverse effect on
our business and results of operations.

We face intense
competition from other high-speed communications solutions that compete with our high-capacity
point-to-point wireless products, which could reduce demand for our products and have a material
adverse effect on our business and results of operations.

Our
products compete with other high-speed communications solutions, including fiber optic
lines, leased copper lines and other wireless technologies. Some of these technologies
utilize existing installed infrastructure and have achieved significantly greater market
acceptance and penetration than high-capacity point-to-point wireless technologies.

Some
of the disadvantages of high capacity, point-to-point wireless technologies that may make
other technologies more appealing include:

| |  | Extreme
Weather Conditions: wireless backhaul solutions may not operate optimally in
certain extreme weather conditions, including severe rainfalls or
hurricanes; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Line-of-Sight
Limitations: wireless backhaul solutions generally require a direct line-of-sight
between antennas. Consequently, service providers often install these solutions on
wireless antenna towers, rooftops of buildings and on other tall structures. As a result,
service providers must generally secure roof or other property rights from the owners of
each building or other structure on which our products are installed. This may delay
deployment and increase the installation costs. Some base stations cannot be linked by
line-of-sight solutions.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

5

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---

In
addition, customers may decide to use transmission frequencies for which we do not offer
products. To the extent that these competing communications solutions reduce demand for
high-capacity point-to-point wireless transmission products, this reduction could have a
materially adverse effect our business and results of operations.

We are dependent upon sales of
our FibeAir® family of products into a single market.
Any reduction in demand for these products in this market would cause our revenues to decrease.

We
design, develop, manufacture and sell nearly all of our products to meet high-capacity
point-to-point wireless backhaul needs. Nearly all of our revenues are generated from
sales of our FibeAir® portfolio of products. We expect sales of our
FibeAir® portfolio of products to continue to account for nearly all of our
revenues for the foreseeable future. As a result, we are more likely to be adversely
affected by a reduction in demand for point-to-point wireless backhaul products than
companies that sell multiple and diversified product lines or into multiple markets.

We sell a significant portion
of our products through a small number of strategic relationships
with OEMs at gross margins that are lower than the gross margins for
our sales directly to customers, which lowers our overall gross
margin. In addition, the loss of one or more of these key OEM
relationships would result in a significant loss of revenues.

We
market and sell our products to customers increasingly through three OEMs that integrate
our solutions into their product offerings. We anticipate that sales to our three OEMs
will constitute an increasing portion our business in the future. For the year ended
December 31, 2008, sales to NSN, our largest OEM, represented approximately 24% of our
revenues.

Our
sales to our OEMs are made on the basis of purchase orders rather than long-term purchase
commitments. Our relationships with our OEMs are generally governed by non-exclusive
agreements that require us to competitively price our products, have no minimum sales
commitments and do not prohibit our OEMs from offering products that compete with our
solutions. The size of purchases by our OEMs typically fluctuates from quarter-to-quarter
and year-to-year, and may continue to fluctuate in the future, which may affect our
quarterly and annual results of operations.

Our
OEM agreements typically have an initial term between one and five years and automatically
renew for successive one year terms. Our agreement with NSN will be renewed on November 1,
2009, unless terminated by either party with three months notice prior to such
automatic renewal. Under certain customary circumstances, including failure to remedy a
breach within 30 days of receiving written notice, either we or NSN may terminate the
agreement. In addition, NSN has the right to terminate the agreement in the event we sell
all or substantially all of our assets, merge or consolidate with a third party, or
undergo a material change of ownership.

Some
of our OEMs also possess significant resources and advanced technical capabilities and
may, either independently or jointly with our competitors, develop and market products and
related services that compete with our solutions. If either of these were to occur, our
OEMs may discontinue marketing, distributing and supporting our solutions. NSN is a
competitor with regard to some of our solutions.

Furthermore,
sales to our OEMs result in lower gross margins than sales directly to end-users through
distributors and re-sellers and expose our business to a number of risks, each of which
could result in a reduction in the revenues for our products. By selling our products to
OEMs, we rely in part on the sales and marketing efforts of the OEMs, as well as on their
post-sale support. These OEMs may decide to promote competing products or alternative
technologies. If our OEMs fail to effectively market and support our products, or if we
experience a loss or a substantial reduction in orders from these OEMs, or one of our OEMs
terminates its relationship with us, our revenues may decline, and our business, financial
condition, and results of operations would be materially adversely affected.

6

---

---

The creation of NSN may
lead to fewer purchases of our products by NSN, which would significantly reduce our
revenues.

As
of November 2005, we entered into an OEM Purchase and Distribution Agreement, which we
refer to as the Nokia OEM Agreement, with Nokia Corporation. Under the Nokia OEM
Agreement, Nokia agreed to include our products with its microwave radio product portfolio
as Nokia PowerHopper Vario to provide complete wireless transmission networking solutions.
After the creation of NSN by Nokia and Siemens in mid-2006, Nokia assigned the Nokia OEM
Agreement to NSN. During 2007 and 2008, sales to NSN accounted for approximately 10% and
24%, respectively of our revenues. NSN has products and capabilities to develop products
that compete with some of ours, and we cannot assure you that NSN will continue to make
substantial purchases of our products under the Nokia OEM Agreement. These purchasing
decisions can be made by NSN on a regional basis, product basis or customer basis. If NSN
decides to promote NSNs current or future products rather than ours, NSN could
become a more significant competitor of ours, which could decrease our sales to NSN and
significantly reduce our revenues.

Consolidation of our
potential customer base could harm our business.

The
trend toward mergers in the telecommunications industry has resulted in the consolidation
of our potential customer base. In situations where an existing customer consolidates with
another industry participant which uses a competitors products, our sales to that
existing customer could be reduced or eliminated completely to the extent that the
consolidated entity decides to adopt the competing products. Further, consolidation of our
potential customer base could result in purchasing decision delays as consolidating
customers integrate their operations and could generally reduce our opportunities to win
new customers to the extent that the number of potential customers decreases. Finally, as
our customers become larger they may have more leverage to negotiate better pricing which
could harm our revenues and gross margins.

We rely on a limited
number of contract manufacturers to manufacture our products and if they experience delays,
disruptions, quality control problems or a loss in capacity, it could materially adversely affect
our operating results.

We
outsource all of our manufacturing processes to a limited number of contract manufacturers
that are located in Israel and the Philippines. We do not have long-term contracts with
any of these contract manufacturers. We have experienced and may in the future experience
delays in shipments from these contract manufacturers.

Our
contract manufacturers may themselves in the future experience manufacturing problems,
including inferior quality and insufficient quantities of components. These delays,
disruptions, quality control problems and loss in capacity could result in delays in
deliveries of our product to our customers, which could subject us to penalties payable to
our customers, increased warranty costs and possible cancellation of orders. If our
contract manufacturers experience financial, operational, manufacturing capacity or other
difficulties, or shortages in components required for manufacturing, our supply may be
disrupted and we may be required to seek alternate manufacturers. We may be unable to
secure alternate manufacturers that meet our needs in a timely and cost-effective manner.
In addition, some of our contract manufacturers have granted us licenses with respect to
certain technology that is used in a number of our products. If we change contract
manufacturers, we may be required to renegotiate such licenses or re-design some of our
products, either of which could increase our cost of revenues and cause product delivery
delays. If we change manufacturers, during such a transition period, we may be more likely
to face delays, disruptions, quality control problems and loss in capacity, and our sales,
profits and customer relationships may suffer.

Our contract manufacturers
obtain some of the components included in our products from a limited
group of suppliers and, in some cases, single or sole source
suppliers. The loss of any of these suppliers could cause us to
experience production and shipment delays and a substantial loss of revenue.

Our
contract manufacturers currently obtain key components from a limited number of suppliers.
Some of these components are obtained from a single or sole source supplier. Our contract
manufacturers dependence on a single or sole source supplier or on a limited number
of suppliers subjects us to the following risks:

7

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| |  | The
component suppliers may experience shortages in components and interrupt or delay their
shipments to our contract manufacturers. Consequently, these shortages could delay the
manufacture of our products and shipments to our customers which could result in
penalties and/or cancellation of orders for our products.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The
component suppliers could discontinue the manufacture or supply of components used in our
systems. In such an event, our contract manufacturers or we may be unable to develop
alternative sources for the components necessary to manufacture our products, which could
force us to redesign our products. Any such redesign of our products would likely
interrupt the manufacturing process and could cause delays in our product shipments.
Moreover, a significant modification in our product design may increase our manufacturing
costs and bring about lower gross margins.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The
component suppliers may increase component prices significantly at any time and with
immediate effect, particularly if demand for certain components increases dramatically in
the global market. These price increases would increase component procurement costs and
could significantly reduce our gross margins and profitability.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We may acquire other
businesses, which could result in integration problems and adversely affect our business.

We
may acquire other businesses. In the event that we consummate such transactions, we may be
subject to risks such as an inability to effectively integrate our sales force and
manufacture and distribute our products and services and an inability to effectively
integrate the technology and other processes of the acquired businesses. Such acquisitions
may also subject us to risks relating to:

| |  | the
diversion of managements attention from our core business during the integration
process;
| | - | ----------------------------------------------------------------------------------------------

| |  | the
management of a larger combined business, including implementing adequate internal
              controls;
| | - | --------------------------------------------------------------------------------------------------------------

| |  | the
loss of key employees of the acquired businesses; and
| | - | ---------------------------------------------------------

| |  | unanticipated
losses in the event the acquisition is not consummated.
| | - | ---------------------------------------------------------------------

However, the acquired businesses may
not achieve the anticipated benefits or result in writedown or in result of impairment
charges. In the event that we consummate the acquisition of other businesses, these
challenges and uncertainties could have a material adverse effect on our business,
financial condition and results of operations.

Our ability to grow
depends on acceptance by our customers of IP-based solutions and our ability to develop
and introduce IP-based products.

The
market for IP-based backhaul equipment for mobile networks is just beginning to evolve.
Our future success depends in part on the acceptance by customers of IP-based networks,
IP-based or hybrid backhaul solutions and IP-based or hybrid products that we are
developing. We cannot control third-party adoption of IP-based backhaul over competing
backhaul solutions such as fiber optic lines. Moreover, our future success depends on our
ability to design and manufacture IP-related products that satisfy our customers
evolving and changing needs for IP-based networks and for IP-based backhaul. If the
IP-based backhaul for mobile networks market does not develop at the rate we expect as a
result of alternative or changing technologies, changes in product standards and
regulation, inability to gain customer acceptance or for any other reason, our future
growth, business, financial condition, and results of operations may be materially
adversely affected.

8

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If we do not succeed in
developing and marketing new products that keep pace with technological developments, changing
industry standards and our customers needs, we may not be able to grow our business.

The
market for our products is characterized by rapid technological advances, changing
customer needs and evolving industry standards, as well as increasing pressures to make
existing products more cost efficient. Accordingly, our success will depend on our ability
to:

| |  | develop
and market new products in a timely manner to keep pace with developments in technology;
| | - | ------------------------------------------------------------------------------------------------

| |  | meet
evolving customer requirements;
| | - | ------------------------------------

| |  | enhance
our current product offerings, including technological improvements which reduce
              the cost and manufacturing time; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------

| |  | deliver
products through appropriate distribution channels.
| | - | -----------------------------------------------------------

In
addition, the wireless equipment industry is subject to evolving industry standards. The
emergence or evolution of new industry standards for wireless products, through official
standards committees or widespread use by operators, could require us to modify our
products. Any such modifications may be expensive and time-consuming or we may not be able
to meet these standards at all. If new industry standards emerge that we do not
anticipate, our products could be rendered obsolete and we may be required to modify our
products in ways that could increase our product costs and adversely affect our
profitability.

We
are continuously seeking to develop new products and enhance our existing products.
Developing new products and product enhancements requires research and development
resources and cooperation with subcontractors. We may not be successful in enhancing our
existing products or developing new products in response to technological advances or to
satisfy increasingly sophisticated customer needs in a timely and cost-effective manner
which would have a material adverse effect on our ability to grow our business.

We rely on a limited
number of contractors as part of our research and development efforts.

We
conduct a part of our research and development activities through outside contractors. We
depend on our contractors ability to achieve stated milestones and commercialize our
products, and on their ability to cooperate and overcome design difficulties. Our
contractors may experience problems, including the inability to recruit professional
personnel, which could delay our research and development process. These delays could:

| |  | increase
our research and development expenses;
| | - | -----------------------------------------------

| |  | delay
the introduction of our upgraded and new products to current and prospective
              customers and our penetration into new markets; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------

| |  | adversely
affect our ability to compete.
| | - | ----------------------------------------

If
our contractors fail to perform, we may be unable to secure alternative contractors that
meet our needs. Moreover, qualifying new contractors may also increase our research and
development expenses.

Our sales cycles in
connection with competitive bids or to prospective customers are lengthy.

It typically takes from three to
twelve months after we first begin discussions with a prospective customer before we
receive an order from that customer. In some instances, we participate in competitive bids
in tenders issued by our customers or prospective customers. These tender processes can
continue for many months before a decision is made by the customer. As a result, we are
required to devote a substantial amount of time and resources to secure sales. In
addition, the lengthy sales cycle results in greater uncertainty with respect to any
particular sale, as events may occur during the sales cycle that impact customers
decisions which, in turn, increases the difficulty of forecasting our results of
operations. During the current global economic crisis, we have experienced a lengthening
of our sales cycle and a stretching out of the planned timeline for new customer projects
and purchasing decisions.

We sell other
manufacturers products as an OEM, which subjects us to various risks that may cause
our revenues to decline.

We
sell a limited number of products on an OEM basis through relationships with a number of
manufacturers. These manufacturers have chosen to sell a portion of their systems through
us in order to take advantage of our reputation and sales channels. The sale of these OEM
products by us depends in part on the quality of these products, the ability of these
manufacturers to deliver their products to us on time and their ability to provide both
presale and post-sale support. Sales of OEM products by us expose our business to a number
of risks, each of which could result in a reduction in the sales of our products. We face
the risks of termination of these relationships, technical and financial problems these
companies might encounter or the promotion of their products through other channels and
turning them into competitors rather than partners. If any of these risks materialize, we
may not be able to develop alternative sources for these OEM products, which may cause our
revenues to decline.

9

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Our products are used in
critical communications networks which may subject us to significant liability claims.

Since
our products are used in critical communications networks, we may be subject to
significant liability claims if our products do not work properly. The provisions in our
agreements with customers that are intended to limit our exposure to liability claims may
not preclude all potential claims. In addition, any insurance policies we have may not
adequately limit our exposure with respect to such claims. We warrant to our current
customers that our products will operate in accordance with our product specifications. If
our products fail to conform to these specifications, our customers could require us to
remedy the failure or could assert claims for damages. Liability claims could require us
to spend significant time and money in litigation or to pay significant damages. Any such
claims, whether or not successful, would be costly and time-consuming to defend, and could
divert managements attention and seriously damage our reputation and our business.

Uncertainty and possible
delays in deployment of advanced wireless and other networks could cause our revenues
to be lower than expected.

Our
sales depend on the deployment of advanced wireless networks and other networks. Any delay
by wireless service providers in their network deployment schedules could result in lower
than expected revenues for us, since these delays would also delay purchasing decisions by
the wireless providers.

Due to the growing volume
of our sales to developing countries, we are susceptible to a number of political and
economic risks that could have a material adverse effect on our business, financial condition
and results of operations.

A
majority of our sales are made in countries in Asia, Africa, Europe (including eastern
Europe) and the Middle East. For the year ended December 31, 2008, sales in these regions
accounted for approximately 83% of our revenues. As a result, the occurrence of any
international, political or economic events that adversely affects our business could
result in significant revenue shortfalls. Any such revenue shortfalls could have a
material adverse effect on our business, financial condition and results of operations.
The following are some of the risks and challenges that we face doing business
internationally, several of which are more likely in the emerging markets than in other
countries:

| |  | unexpected
changes in regulatory requirements;
| | - | ----------------------------------------------

| |  | fluctuations
in foreign currency exchange rates;
| | - | ------------------------------------------------

| |  | imposition
of tariffs and other barriers and restrictions;
| | - | ----------------------------------------------------------

| |  | management
and operation of an enterprise spread over various countries;
| | - | ------------------------------------------------------------------------

| |  | burden
of complying with a variety of foreign laws;
| | - | ---------------------------------------------------

| |  | general
economic and geopolitical conditions, including inflation and trade relationships;
| | - | ------------------------------------------------------------------------------------------

| |  | longer
sales cycles;
| | - | --------------------

| |  | difficulties
in protecting intellectual property;
| | - | -------------------------------------------------

| |  | laws
and business practices favoring local competitors;
| | - | -------------------------------------------------------

| |  | demand
for high-volume purchases with discounted prices;
| | - | --------------------------------------------------------

10

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| |  | payment
delays and uncertainties; and
| | - | -------------------------------------

| |  | civil
unrest, war and acts of terrorism.
| | - | ----------------------------------------

We are increasingly engaged in
supplying installation or turnkey projects for our customers which
are subject to acceptance testing procedures. Any delay or failure in
such acceptance tests would have a material adverse effect on our
results of operations.

As
we continue to expand our geographic footprint, we are increasingly engaged in supplying
installation and other services for our customers, often in developing nations. In this
context, we may act as prime contractor and equipment supplier for network build-out
projects, providing installation, supervision and testing services required for these
projects, or we may provide such services and equipment for projects handled by system
integrators. In such cases, we typically bear the risks of loss and damage and title to
our products until the customer has issued an acceptance certificate upon successful
completion of acceptance tests. If our products are damaged or stolen, or if the network
we install does not pass the acceptance tests, the end user or the system integrator, as
the case may be, could refuse to pay us and we would incur substantial costs, including
fees owed to our installation subcontractors, increased insurance premiums, transportation
costs, and expenses related to repairing or manufacturing the products. Moreover, in such
a case, we may not be able to repossess the equipment, thus suffering additional losses.

If we fail to obtain
regulatory approval for our products, or if sufficient radio frequency spectrum is not
allocated for use by our products, our ability to market our products may be restricted.

Radio
communications are subject to regulation in most jurisdictions and to various
international treaties relating to wireless communications equipment and the use of radio
frequencies. Generally, our products must conform to a variety of regulatory requirements
established to avoid interference among users of transmission frequencies and to permit
interconnection of telecommunications equipment. Any delays in compliance with respect to
our future products could delay the introduction of those products. Also, these regulatory
requirements may change from time to time, which could affect the design and marketing of
our products as well as the competition we face from other suppliers products.

In
addition, in most jurisdictions in which we operate, users of our products are generally
required to either have a license to operate and provide communications services in the
applicable radio frequency or must acquire the right to do so from another license holder.
Consequently, our ability to market our products is affected by the allocation of the
radio frequency spectrum by governmental authorities, which may be by auctions or other
regulatory selection. These governmental authorities may not allocate sufficient radio
frequency spectrum for use by our products or we may not be successful in obtaining
regulatory approval for our products from these authorities. Historically, in many
developed countries, the lack of available radio frequency spectrum has inhibited the
growth of wireless telecommunications networks. If sufficient radio spectrum is not
allocated for use by our products, our ability to market our products may be restricted
which would have a materially adverse effect on our business, financial condition and
results of operations. Additionally, regulatory decisions allocating spectrum for use in
wireless backhaul at frequencies used by our competitors products could increase the
competition we face.

Other
areas of regulation and governmental restrictions, including tariff on imports and
technology controls on exports, could adversely affect our operations and financial
results.

Widespread use of
wireless products may have health and safety risks.

Our
wireless communications products emit electromagnetic radiation. In recent years, there
has been publicity regarding the potentially negative direct and indirect health and
safety effects of electromagnetic emissions from wireless telephones and other wireless
equipment sources, including allegations that these emissions may cause cancer. Health and
safety issues related to our products may arise that could lead to litigation or other
actions against us or to additional regulation of our products. We may be required to
modify our technology and may not be able to do so. We may also be required to pay damages
that may reduce our profitability and adversely affect our financial condition. Even if
these concerns prove to be baseless, the resulting negative publicity could affect our
ability to market these products and, in turn, could harm our business and results of
operations. Claims against other wireless equipment suppliers or wireless service
providers could adversely affect the demand for our backhaul solutions.

11

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Part of our inventory may be
written off, which would increase our cost of revenues. In addition,
we may be exposed to inventory-related losses on inventories
purchased by our contract manufacturers.

Inventory
of raw materials, work in-process or finished products may accumulate in the future, and
we may encounter losses due to a variety of factors including:

| |  | new
generations of products replacing older ones;
| | - | -------------------------------------------------

| |  | the
need of our contract manufacturers to order raw materials that have long lead times and
our inability to estimate exact amounts and types of items thus needed, especially with
regard to the frequencies in which the final products ordered will operate; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | changes
in products because of technological advances and cost reduction measures.
| | - | ----------------------------------------------------------------------------------

Further,
our inventory of finished products may accumulate if a customer were to cancel an order or
refuse to physically accept delivery of our products. The rate of such accumulation may
increase in a period of economic downturn.

Our
contract manufacturers are required to purchase inventory based on manufacturing
projections we provide to them. If our actual orders from our customers are lower than
these manufacturing projections, our contract manufacturers will have excess inventory of
raw materials or finished products which we would be required to purchase.

In
addition, we require our contract manufacturers from time to time to purchase more
inventory than is immediately required, and to partially assemble components, in order to
shorten our delivery time in case of an increase in demand for our products. In the
absence of such increase in demand, we may need to compensate our contract manufacturers.

If
we are required to purchase excess inventory from our contract manufacturers or otherwise
compensate our contract manufacturers for purchasing excess inventory, our business,
financial condition, and results of operations could be materially adversely affected.

We
also may purchase components or raw materials from time to time for use by our contract
manufacturers in the manufacturing of our products. These purchases are based on our own
manufacturing projections. If our actual orders are lower than these manufacturing
projections, we may accumulate excess inventory which we may be required to write-off. If
we are forced to write-off this inventory other than in our ordinary course of business,
our business, financial condition, results of operations could be materially adversely
effected.

If we are unable to
protect our intellectual property rights, our competitive position may be harmed.

Our
ability to compete will depend, in part, on our ability to obtain and enforce intellectual
property protection for our technology internationally. We currently rely upon a
combination of trade secret, trademark and copyright laws, as well as contractual rights,
to protect our intellectual property.

Until
recently, we have not aggressively pursued patent protection and consequently, our patent
portfolio may not be as extensive as those of our competitors. As a result, we may have
limited ability to assert any patent rights in negotiations with, or in counterclaiming
against, competitors who assert intellectual property rights against us.

We
also enter into confidentiality, non-competition and invention assignment agreements with
our employees and contractors engaged in our research and development activities, and
enter into non-disclosure agreements with our suppliers and certain customers so as to
limit access to and disclosure of our proprietary information. We cannot assure you that
any steps taken by us will be adequate to deter misappropriation or impede independent
third-party development of similar technologies. Moreover, under current law, we may not
be able to enforce the non-competition agreements with our employees to their fullest
extent.

12

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We
cannot assure you that the protection provided to our intellectual property by the laws
and courts of foreign nations will be substantially similar to the remedies available
under U.S. law. Furthermore, we cannot assure you that third parties will not assert
infringement claims against us based on foreign intellectual property rights and laws that
are different from those established in the United States. Any such failure or inability
to obtain or maintain adequate protection of our intellectual property rights for any
reason could have a material adverse effect on our business, results of operations and
financial condition.

Defending against
intellectual property infringement claims could be expensive and could disrupt our business.

The
wireless equipment industry is characterized by vigorous protection and pursuit of
intellectual property rights, which has resulted in often protracted and expensive
litigation. NEC, another wireless equipment provider, has asserted that we have been using
its intellectual property in certain of our products, and we are in discussions concerning
NECs allegation. On August 8, 2007, we made a settlement offer to NEC in order to
fully resolve NECs allegations. This settlement offer included a lump sum payment of
$450,000 and certain other cross-licensing arrangements in consideration for a release of
any potential claim of infringement relating to NECs allegations. We are currently
awaiting a response from NEC. We believe that our products do not infringe NECs
patents and that we have meritorious defenses if infringement is alleged. However, we are
not able to estimate the outcome of the discussions with NEC, including whether there
could be an adverse effect on our business. In light of the offer we made to NEC, a
provision of $450,000 was included in our financial statements as of December 31, 2008.

We
are involved in discussions with another party regarding the licensing of that
partys intellectual property, but we are unable to estimate the outcome of such
discussions. We may in the future be notified that we are infringing certain patent or
other intellectual property rights of others. Any such litigation or claim, including any
litigation or claim resulting from NECs assertion, could result in substantial costs
and diversion of resources. In the event of an adverse result of any such litigation, we
could be required to pay substantial damages (including potentially treble damages and
attorneys fees should a court find such infringement willful), cease the use and
licensing of allegedly infringing technology and the sale of allegedly infringing products
and expend significant resources to develop non-infringing technology or to obtain
licenses for the infringing technology. We cannot assure you that we would be successful
in developing such non-infringing technology or that any license for the infringing
technology would be available to us on commercially reasonable terms, if at all.

If we fail to attract and
retain qualified personnel, our business, operations and product development efforts
may be materially adversely affected.

Our
products require sophisticated research and development, marketing and sales, and
technical customer support. Our success depends on our ability to attract, train and
retain qualified personnel in all these areas. We compete with other companies for
personnel in all of these areas and we may not be able to hire sufficient personnel to
achieve our goals or support the anticipated growth in our business. The market for the
highly-trained personnel we require is competitive, due to the limited number of people
available with the necessary technical skills and understanding of our products and
technology. If we fail to attract and retain qualified personnel due to compensation or
other factors, our business, operations and product development efforts would suffer.

Our international
operations expose us to the risk of fluctuation in currency exchange rates.

In
2008, we derived the majority of our revenues in U.S. dollars. Although a majority of our
revenues were denominated in U.S. dollars, a portion of our expenses were denominated in
New Israeli shekels, or NIS, and to a significantly lesser extent in euros. Our
NIS-denominated expenses consist principally of salaries and related costs and related
personnel expenses. We anticipate that a portion of our expenses will continue to be
denominated in NIS. In 2008, the NIS fluctuated significantly in comparison to the U.S.
dollar, devaluating by 13% in the first half of the year and then appreciating by
approximately 13% in the second half of the year. In total, during 2008, the NIS
devaluated by 1.14% in comparison to the U.S. dollar. If the U.S. dollar weakens against
the NIS in the future, there will be a negative impact on our profit margins. In addition,
if we wish to maintain the dollar-denominated value of our products in non-U.S. markets,
devaluation in the local currencies of our customers relative to the U.S. dollar could
cause our customers to cancel or decrease orders or default on payment. In some cases, we
are paid in local currencies or maintain monetary assets in local currencies, creating
additional exposure to the risk of devaluation of such currencies relative to the dollar.

13

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If we are characterized
as a passive foreign investment company, our U.S. shareholders may suffer adverse tax
consequences, including higher tax rates and potentially punitive interest charges on the proceeds
of share sales.

We
do not believe that during the year ended December 31, 2008 we were a passive foreign
investment company, or PFIC, for U.S. federal income tax purposes. Foreign companies may
generally be characterized as a PFIC if for any taxable year 75% or more of such
companys gross income is passive income, or at least 50% of the average value of all
such companys assets are held for the production of, or produce, passive income. If
we are characterized as a passive foreign investment company, our U.S. shareholders may
suffer adverse tax consequences, including having gains realized on the sale of our
ordinary shares treated as ordinary income, rather than capital gain income, and having
potentially punitive interest charges apply to the proceeds of share sales.

It
is possible that the Internal Revenue Service will attempt to treat us as a PFIC for the
taxable year ending December 31, 2009 or prior years. The tests for determining PFIC
status are applied annually and it is difficult to make accurate predictions of our future
income, assets, activities and market capitalization, including fluctuations in the price
of our ordinary shares, which are relevant to this determination. Accordingly, there can
be no assurance that we will not become a PFIC in 2009 or in subsequent years. For a
discussion of the rules relating to passive foreign investment companies and related tax
consequences, please see the section of this annual report entitled U.S. Federal
Income Tax Considerations.

Our operating results may
vary significantly from quarter to quarter and these quarterly variations in operating results, as
well as other factors, may contribute to the volatility of the market price of our shares.

Our
quarterly results are difficult to predict and may vary significantly from quarter to
quarter. Most importantly, delays in product delivery or completion of a sale can cause
our revenues and net income to fluctuate significantly from anticipated levels.
Furthermore, we may temporarily reduce prices in response to competition or increase
spending in order to pursue new market opportunities. Additionally, the following factors
may also cause fluctuations in our quarterly results:

| |  | volume
and timing of product orders received and delivered during the quarter;
| | - | ------------------------------------------------------------------------------

| |  | the
ability of our contract manufacturers to manufacture products on time;
| | - | --------------------------------------------------------------------------

| |  | the
timing of when our customers provide acceptance certificates in turnkey projects;
| | - | -------------------------------------------------------------------------------------

| |  | timing
of new product introductions by us or our competitors;
| | - | -------------------------------------------------------------

| |  | changes
in the mix of products sold by us;
| | - | ------------------------------------------

| |  | cost
and availability of components and subsystems;
| | - | ---------------------------------------------------

| |  | adoption
of new technologies and industry standards;
| | - | ----------------------------------------------------

| |  | competitive
factors, including pricing, availability and demand for competing products;
| | - | ---------------------------------------------------------------------------------------

| |  | ability
of our customers to obtain financing to enable their purchase of our products;
| | - | --------------------------------------------------------------------------------------

| |  | fluctuations
in foreign currency exchange rates;
| | - | ------------------------------------------------

| |  | worldwide
regulatory developments; and
| | - | --------------------------------------

| |  | general
economic conditions in the United States and internationally.
| | - | ---------------------------------------------------------------------

14

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The
quarterly variation of our operating results, may, in turn, create volatility in the
market price for our shares. Other factors that may contribute to wide fluctuations in our
market price, many of which are beyond our control, include, but are not limited to:

| |  | announcements
of technological innovations;
| | - | -------------------------------------------

| |  | customer
orders or new products or contracts;
| | - | ---------------------------------------------

| |  | competitors'
positions in the market;
| | - | -------------------------------------

| |  | changes
in financial estimates by securities analysts;
| | - | ------------------------------------------------------

| |  | our
earnings releases and the earnings releases of our competitors; and
| | - | -----------------------------------------------------------------------

| |  | the
general state of the securities markets (with particular emphasis on the technology and
Israeli sectors thereof).
| | - | ---------------------------------------------------------------------------------------------------------------------

| |  | the
general state of the credit markets, the current volatility of which could have an
adverse effect on our investments.
| | - | -------------------------------------------------------------------------------------------------------------------------

In
addition to the volatility of the market price of our shares, the stock market in general
and the market for technology companies in particular have been highly volatile and at
times thinly traded. Investors may not be able to resell their shares following periods of
volatility.

Due to the size of their
shareholdings, Yehuda and Zohar Zisapel have influence over matters requiring shareholder
approval.

As
of March 15, 2009, Yehuda Zisapel beneficially owned, directly or indirectly, 6.6% of our
outstanding ordinary shares; and Zohar Zisapel beneficially owned, directly or indirectly,
12.8% of our outstanding ordinary shares. Yehuda and Zohar Zisapel are brothers who do not
have a voting agreement,. As a result, these shareholders may influence the outcome of
various actions that require shareholder approval.

Provisions of our
Articles of Association, Memorandum of Association and Israeli law could delay, prevent
or make difficult a change of control and therefore depress the price of our shares.

The
Israeli Companies Law, or the Companies Law, generally provides that a merger be approved
by the board of directors and by a majority of shareholders, and has specific provisions
for determining the majority of the shareholder vote. However, with respect to companies
such as ours which were incorporated prior to the effectiveness of the Companies Law,
shareholder approval of a merger must be obtained by at least 75% of the shares
participating at the shareholders meeting and voting thereon, not taking into
account any abstentions. Shareholders may resolve to lower this super-majority
requirement; however, such a resolution must be approved by at least a 75% majority.
Moreover, the modification of our Memorandum of Association requires a 75% majority vote,
and such a requirement may subject certain types of merger transactions or other business
combinations to the same super-majority approval requirements. Additionally, upon the
request of any creditor of a party to the proposed merger, a court may delay or prevent
the merger if it concludes that there is a reasonable concern that, as a result of the
merger, the surviving company will be unable to satisfy its obligations to creditors.
Further, a merger generally may not be completed until the passage of certain time
periods. In certain circumstances, an acquisition of shares in a public company must be
made by means of a tender offer. Our Articles of Association provide that our directors
(other than the external directors) are divided into two classes: Class I and Class II. A
director will generally serve for a term ending on the date of the third annual general
meeting following the annual general meeting at which such director was elected. This
election mechanism may discourage a takeover of our company.

Furthermore,
certain provisions of other Israeli laws may have the effect of delaying, preventing or
making more difficult an acquisition of or merger with us, which could depress our share
price. For example, Israeli tax law treats some acquisitions, such as share-for-share
exchanges between an Israeli company and a foreign company, less favorably than U.S. tax
laws. In addition, a merger, which may include the acquisition of more than 25% of the
share capital of our company, may be subject to approval by the Israeli Controller of
Restrictive Trade Practices, who may impede or delay a merger in accordance with the
Restrictive Trade Practices Law, 1988. Finally, we must comply with the requirements of
the Israeli Law for the Encouragement of Industrial Research and Development of 1984 and
regulations promulgated there under, which we refer to as the R&D Law, which may
restrict our ability to consummate a merger or similar transaction.

15

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# Risks Relating to Our
Location in Israel

Conditions in Israel may
limit our ability to produce and sell our products. This could result in a decrease of
our revenues.

Our
principal offices and research and development facilities, and the majority of our
contract manufacturers facilities are located in Israel. Accordingly, we are
directly influenced by the political, economic and military conditions affecting Israel.
Specifically, we could be adversely affected by:

| |  | any
major hostilities involving Israel;
| | - | ---------------------------------------

| |  | the
interruption or curtailment of trade between Israel and its present trading partners;
| | - | -----------------------------------------------------------------------------------------

| |  | a
full or partial mobilization of the reserve forces of the Israeli army; and
| | - | -----------------------------------------------------------------------------

| |  | a
significant downturn in the economic or financial condition of Israel.
| | - | ------------------------------------------------------------------------

Since
the establishment of the State of Israel in 1948, a number of armed conflicts have taken
place between Israel and its Arab neighbors, and a state of hostility, varying from time
to time in intensity and degree, has led to security and economic problems for Israel. In
the summer of 2006, Israel was engaged in an armed conflict with Hezbollah, a Lebanese
Islamist Shiite militia group, along Israels northern border, which involved daily
missile strikes that disrupted most day-to-day civilian activity in northern Israel. In an
attempt to stop missile strikes from the Gaza Strip against Israelis, in January 2009
Israel became engaged in an armed conflict with Hamas in the Gaza Strip, during which
missile attacks aimed at populated areas in parts of southern Israel (some of which are in
vicinity of warehouse space we use) continued daily, disrupting most day-to-day civilian
activity in these areas. These developments have further strained relations between Israel
and the Palestinians. Any on-going or future violence between Israel and the Palestinians,
armed conflicts, terrorist activities, tension along Israels northern borders, or
political instability in the region would likely disrupt international trading activities
in Israel and may materially and negatively affect our business conditions and those of
our major contract manufacturers and could harm our results of operations.

Certain
countries, as well as certain companies and organizations, continue to participate in a
boycott of Israeli firms and others doing business with Israel and Israeli companies.
Thus, there have been sales opportunities that we could not pursue and there may be such
opportunities in the future from which we will be precluded. For example, certain
countries participating in the boycott described above have recently been increasing their
investment in telecom operators in Africa. This growing control of the market in Africa
could lead to a decrease of our sales in Africa in the future. We are also precluded from
marketing our products to certain of these countries due to U.S. and Israeli regulatory
restrictions. In addition, such boycott, restrictive laws, policies or practices may
change over time and we cannot predict which countries, as well as whether certain
companies and organizations, will be subject thereto. The boycott, restrictive laws,
policies or practices directed towards Israel or Israeli businesses could, individually or
in the aggregate, have a material adverse affect on our business in the future.

Some
of our executive officers and employees in Israel are, unless exempt, obligated to perform
annual military reserve duty in the Israel Defense Forces, depending on their age and
position in the army. Additionally, they may be called to active reserve duty at any time
under emergency circumstances for extended periods of time. Our operations could be
disrupted by the absence for a significant period of time of one or more of our executive
officers or key employees due to military service, and any significant disruption in our
operations could harm our business. The full impact on our workforce or business if some
of our executive officers and employees will be called upon to perform military service,
especially in times of national emergency, is difficult to predict.

16

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We
can give no assurance that the political and security situation in Israel, as well as the
economic situation, will not have a material impact on our business in the future.

Since we received Israeli
government grants for research and development expenditures, we are subject to ongoing
restrictions and conditions, including restrictions on our ability to manufacture
products and transfer technologies outside of Israel.

We
received grants from the Government of Israel through the Office of the Chief Scientist of
the Ministry of Industry, Trade and Labor, or the OCS, for the financing of a significant
portion of our research and development expenditures in Israel through the end of 2006. We
therefore must comply with the requirements of the R&D Law. Under the R&D Law, we
cannot transfer technology developed with OCS grants, including by the sale of the
technology, the grant of a license of such technology or the manufacture of a significant
amount of our products that are based on such technology outside of Israel, unless we
obtain the approval of an OCS committee. There is no assurance that we will receive such
OCS approvals. Even if such OCS approvals are obtained, we may be required to pay
additional royalties to the OCS or, in case of a transfer of the technology outside of
Israel, a percentage of the consideration paid for such transfer equal to the ratio of the
aggregate amount of OCS grants received by us and the aggregate amount of all cash
investments made in our company, including the OCS grants. If we fail to comply with any
of the requirements of the R&D Law and of those imposed by the OCS, we may be required
to pay additional royalties to the OCS together with interest and penalties, and we may be
subject to criminal charges. In addition, under the R&D Law, any non-Israeli who
becomes a direct holder of 5% or more of our share capital is required to notify the OCS
and to undertake to observe the law governing the grant programs of the OCS, the principal
restrictions of which are the transferability limits described above in this paragraph.

In
December 2006, we entered into an agreement with the OCS to conclude our research and
development grant programs sponsored by the OCS. Under the agreement, we were obligated to
repay the OCS approximately $11.9 million in outstanding grants, in six semiannual
installments from 2007 through 2009. During the second quarter of 2008, we paid the OCS
approximately $7.4 million to retire all the debt remaining from this agreement. We
entered into this agreement because we believed that accelerating the interest-bearing
royalty payments to the OCS would reduce our aggregate interest payments relating to the
repayment of the grants. The agreement with the OCS will impact our future results of
operations in two respects: first, we will no longer receive additional grants from the
OCS, which would have offset our research and development costs; second, we will no longer
record expenses relating to royalty payments to the OCS. As a result of our agreement with
the OCS, we recorded non-recurring expenses of $10.4 million in 2006 as part of our cost
of revenues. Our agreement with the OCS does not amend the terms of the OCS grants we
received, and does not release us from continued compliance with the provisions of the
R&D Law.

The tax benefits to which we
are currently entitled from our approved enterprise program require
us to satisfy specified conditions. If we fail to satisfy these
conditions, we may be required to pay increased taxes and would
likely be denied these benefits in the future.

The
Investment Center of the Ministry of Industry, Trade and Labor has granted approved
enterprise status to investment programs at our facility in Tel Aviv. When we begin
to generate taxable income from these approved enterprise programs, the portion of our
income derived from these programs will be exempt from tax for a period of two years and
will be subject to a reduced tax for an additional eight years thereafter, depending on
the percentage of our share capital held by non-Israelis. The benefits available to an
approved enterprise program are dependent upon the fulfillment of conditions stipulated
under applicable law and in the certificate of approval. If we fail to comply with these
conditions, in whole or in part, or fail to get approval in whole or in part, we may be
required to pay additional taxes for the period in which we benefited from the tax
exemption or reduced tax rates and would likely be denied these benefits in the future.
The amount by which our taxes would increase will depend on the difference between the
then applicable tax rate for non-approved enterprises and the rate of tax, if any, that we
would otherwise pay as an approved enterprise, and the amount of any taxable income that
we may earn in the future.

17

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The tax benefits
available to approved enterprise programs may be reduced or eliminated in the future. This
would likely increase our tax liability.

The
Israeli government may reduce or eliminate in the future tax benefits available to
approved enterprise programs. Our approved program and the resulting tax benefits may not
continue in the future at their current levels or at any level. The termination or
reduction of these tax benefits would likely increase our tax liability. The amount, if
any, by which our tax liability would increase will depend upon the rate of any tax
increase, the amount of any tax benefit reduction, and the amount of any taxable income
that we may earn in the future.

It may be difficult to
enforce a U.S. judgment against us, and our officers and directors named in this annual
report, to assert U.S. securities laws claims in Israel and to serve process on
substantially all of our officers and directors.

We
are incorporated under the laws of the State of Israel. Service of process upon us and our
directors and officers, substantially all of whom reside outside the United States, may be
difficult to obtain within the United States. Furthermore, because the majority of our
assets and investments, and substantially all of our directors and officers are located
outside the United States, any judgment obtained in the United States against us or any of
them may not be collectible within the United States. It may be difficult to assert U.S.
securities law claims in original actions instituted in Israel. Israeli courts may refuse
to hear a claim based on a violation of U.S. securities laws because Israel is not the
most appropriate forum to bring such a claim. In addition, even if an Israeli court agrees
to hear a claim, it may determine that Israeli law and not U.S. law is applicable to the
claim. If U.S. law is found to be applicable, the content of applicable U.S. law must be
proved as a fact, which can be a time-consuming and costly process. Certain matters of
procedure will also be governed by Israeli law. There is little binding case law in Israel
addressing these matters.

Subject
to specified time limitations and legal procedures, Israeli courts may enforce a U.S.
final judgment in a civil matter, including a judgment based upon the civil liability
provisions of the U.S. securities laws, and including a judgment for the payment of
compensation or damages in a non-civil matter, provided that:

| |  | the
judgment was given by a court which was, according to the laws of the state of the court,
competent to give it;
| | - | -------------------------------------------------------------------------------------------------------------------

| |  | the
judgment is executory in the state in which it was given;
| | - | -------------------------------------------------------------

| |  | the
judgment is no longer appealable;
| | - | -------------------------------------

| |  | the
judgment was not given by a court that is not competent to do so under the rules of
              private international law applicable in Israel;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------

| |  | there
has been due process;
| | - | ---------------------------

| |  | the
obligation imposed by the judgment is enforceable according to the rules relating to the
enforceability of judgments in Israel and the substance of the judgment is not contrary
to public policy;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
judgment was not obtained by fraud and does not conflict with any other valid judgment in
the same matter between the same parties; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------

| |  | an
action between the same parties in the same matter is not pending in any Israeli court or
tribunal at the time the lawsuit is instituted in the U.S. court.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------

Even
if these conditions are satisfied, an Israeli court will not enforce a foreign judgment if
it was given in a state whose laws do not provide for the enforcement of judgments of
Israeli courts (subject to exceptional cases) or if its enforcement is likely to prejudice
the sovereignty or security of the State of Israel.

18

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|ITEM 4. |  | INFORMATION ON THE COMPANY
|------- |  | --------------------------

A.
          History and Development of the Company

We
were incorporated under the laws of the State of Israel on July 23, 1996 as Giganet Ltd.
We changed our name to Ceragon Networks Ltd. on September 6, 2000. We operate under the
Israeli Companies Law. Our registered office is located at 24 Raoul Wallenberg Street, Tel
Aviv 69719, Israel and the telephone number is 011-972-3-645-5733. Our world wide web
address is www.ceragon.com. Information contained on our website does not constitute a
part of this annual report.

Our
agent for service of process in the United States is Ceragon Networks, Inc., our wholly
owned U.S. subsidiary and North American headquarters, located at 10 Forest Avenue, Suite
120, Paramus, New Jersey 07652.

In
the years ended December 31, 2008, 2007 and 2006, our capital expenditures were $5.0
million, $2.9 million and $1.4 million, respectively, and were spent primarily on
investment in production test equipment, information-technology systems, equipment for
research and development, general computer software and hardware and leasehold
improvements. We have no current commitments for capital expenditures.

# B. Business Overview

We
are a leading provider of high capacity wireless backhaul solutions that enable wireless
service providers to deliver voice and premium data services, such as Internet browsing,
music and video applications. Our wireless backhaul solutions use microwave technology to
transfer large amounts of network traffic between base stations and the infrastructure at
the core of the mobile network.

We
design our solutions to provide fiber-like connectivity for circuit-switched, or
SONET/SDH, networks, next generation Ethernet/Internet Protocol, or IP-based, networks,
and hybrid networks that combine circuit-switched and IP-based networks. Our solutions
support all wireless access technologies, including GSM, CDMA, EV-DO and WiMAX. These
solutions address wireless service providers need to cost-effectively build out and
scale their infrastructure to meet the increasing demands placed on their networks by
growing numbers of subscribers and the increasing demand for premium data services.

We
also provide our solutions to businesses and public institutions that operate their own
private communications networks. Our solutions are deployed by more than 150 service
providers of all sizes, as well as in hundreds of private networks, in nearly 100
countries.

# Industry Background

Wireless
communication is increasingly a medium of choice for the access and transport of voice and
premium data services. The market for high-capacity wireless backhaul solutions is
comprised of both circuit-switched and IP-based solutions. The market for wireless
backhaul is being generated primarily by wireless service providers and businesses and
public institutions operating private networks.

The
rapid growth in demand for high capacity backhaul solutions has been driven by global
subscriber growth, particularly in emerging markets, new wireless network build-outs in
developing countries and strong consumer demand for mobile data services in developed
countries. These trends have significantly increased the amount of traffic that must be
accommodated by wireless service providers backhaul infrastructure. As a result,
existing backhaul capacity is heavily strained, creating a bottleneck that hinders service
delivery and quality. Service providers are increasingly meeting their backhaul needs by
deploying high capacity point-to-point wireless links. These providers are also beginning
to upgrade their communications infrastructure to IP-based networks that have
significantly greater capacity to accommodate high bandwidth premium data services. The
deployment of these IP-based networks requires additional investment in high capacity
backhaul solutions. In addition, as some wireless service providers upgrade their
infrastructure from circuit-switched to IP-based networks, they require hybrid backhaul
solutions which accommodate both types of transmission architectures.

19

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Wireless Service Providers

In
order to address the strain on backhaul capacity, wireless service providers have a number
of alternatives, including leasing existing copper or fiber lines, laying new fiber optic
networks or deploying wireless backhaul solutions. Leasing existing lines requires a
significant increase in operating expenses and, in some cases, requires the wireless
service provider to depend on a direct competitor. Laying new fiber-optic lines is
capital-intensive and these lines cannot be rapidly deployed. The deployment of high
capacity point-to-point wireless links represents a scalable, flexible and cost-effective
alternative for expanding backhaul capacity. Wireless backhaul solutions enable wireless
service providers to add capacity only as required while significantly reducing upfront
and ongoing backhaul costs.

Private Networks

Many
large businesses and public institutions require private high bandwidth communication
networks to connect multiple locations. These private networks are typically built using
IP-based communications infrastructure. This market includes educational institutions,
utility companies, municipalities and public safety defense contractors. These customers
continue to invest in their private communications networks for numerous reasons,
including security concerns, the need to exercise control over network service quality and
redundant network access requirements. As data traffic on these networks rises, we expect
that businesses and public institutions will continue to invest in their communications
infrastructure, including backhaul equipment. Like wireless service providers, customers
in this market demand a highly reliable, cost-effective backhaul solution that can be
easily installed and scaled to their bandwidth requirements.

# Our Solutions

We
offer a broad portfolio of innovative, field-proven, high capacity wireless backhaul
solutions which enable wireless service providers to eliminate the backhaul capacity
bottleneck, significantly reduce backhaul costs and transition to next generation IP-based
networks. We also provide solutions to businesses and public institutions that operate
their own private communications networks. We believe our solutions have proven their
ability to provide high performance in a cost-effective manner, and they are
differentiated in the following ways:

| | Leading
Offering for Existing Backhaul Market. We believe that we provide our customers with
a leading offering of high capacity wireless backhaul solutions for the broader wireless
backhaul market. Our competitive differentiation is demonstrated by our relationship with
Nokia Siemens Networks B.V., or NSN, and other leading OEMs, as well as by our global
customer base. This differentiation results from our focus on product development from
components to subsystem integration to overall system solution design.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Leading
Solution for Emerging IP-based Networks. Our IP-based wireless backhaul solutions
provide fiber-like performance with high throughput speeds of 50 to 900 megabits per
second, high availability and low latency. Our solutions enable wireless service
providers to transition to IP-based networks. Our suite of IP-based wireless backhaul
products and hybrid network products is currently deployed in hundreds of private
networks around the world. These solutions were the first of their kind to receive
certification from Metro Ethernet Forum, a leading industry alliance of
telecommunications service providers and other industry participants that develops
technical specifications to promote the adoption of IP-based networks.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Broad
Product Portfolio. We offer a broad range of high capacity wireless backhaul
solutions, enabling us to offer complete solutions for the specific needs of a wide range
of customers, based on service type, frequency, distance and capacity requirements. In
addition to our circuit-switched and IP-based products, we also offer hybrid solutions
that deliver both circuit-switched and IP traffic over a single radio. This functionality
makes them particularly attractive for wireless service providers preparing to upgrade to
an IP-based backhaul network.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Low
Total Cost of Ownership. Our solutions address industry requirements for low total
cost of ownership backhaul solutions. Total cost of ownership includes the combined costs
of initial acquisition, installation and ongoing operation and maintenance, regardless of
whether these costs are incurred through leasing arrangements or operating owned
equipment.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| | Scalability
and Flexibility. We design our products to enable incremental deployment to meet
increased service demand. This enables wireless service providers to rapidly deploy
additional capacity as it is needed. This approach allows our customers to establish a
wireless broadband network with a relatively low initial investment and later expand the
geographic coverage area of their networks as subscriber demand increases.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Our Products

We
market all of our products under the trademark FibeAir®. These products
utilize microwave radio technologies that enable our customers to optimize range and
frequency efficiency, which we refer to as the modulation scheme, and to dynamically adapt
to weather conditions. The diverse FibeAir®product family offers products
that address the complete backhaul needs of IP-based, hybrid and circuit-switched
networks:

|Network Infrastructure | IP-based       | Hybrid           | Circuit Switched
|---------------------- | -------------- | ---------------- | ----------------
|
|
|
|
|Description            | High-Capacity  | High-Capacity    | High-Capacity   
|                       | Ethernet       | Circuit-switched | Multi-Service   
|                       |                | Ethernet         |                 
|                      
|Interfaces             | Gigabit        | Multiple         | Gigabet         
|                       | Ethernet, Fast | Gigabit          | Ethernet        
|                       | Ethernet       | Ethernet,        | multiple E1/T1, 
|                       |                | Multiple Fast    | Fast Ethernet   
|                       |                | Ethernet         | multiple E1/T1  
|                      
|Typical                | WiMAX          | Metro area       | Wireless        
|Applications           | backhaul,      | networks, Long   | backhaul,       
|                       | Metro area     | distance         | Private networks
|                       | networks,      | networks         |                 
|                       | Private        |                  |                 
|                       | networks       |                  |                 
|                      
|Type of                | WiMax          | Incumbent        | Wireless        
|Customers              | carriers,      | local exchange   | service         
|                       | Wireless ISPs, | carriers,        | providers,      
|                       | Incumbent      | Public           | Incumbent local 
|                       | local exchange | institutions     | exchange        
|                       | carriers,      |                  | carriers        
|                       | Businesses,    |                  |                 
|                       | Public         |                  |                 
|                       | institutions   |                  |                 

Our
IP-based network products use native IP technologies and our hybrid products use our
Native2 technologies which allow our hybrid products to transmit both IP-based and
circuit-switched network traffic on a native basis. Native IP refers to systems that are
designed to transport IP-based network traffic directly rather than adapting IP-based
network traffic to existing circuit-switched systems. This approach increases efficiency
and decreases latency.

Our
products are typically sold as a complete system comprised of four components: an outdoor
unit, an indoor unit, a compact high-performance antenna and a network management system.

| |  | Indoor
units convert the transmission signals from digital to intermediate or radio frequency
signals and vice versa, process and manage information transmitted to and from the
outdoor unit, aggregate multiple transmission signals and provide a physical interface to
wireline networks.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Outdoor
units are used to control power transmission, convert intermediate frequency signals to
radio frequency signals and vice versa, and provide an interface between antennas and
indoor units. They are contained in compact weather-proof enclosures fastened to
antennas. Indoor units are connected to outdoor units by standard coaxial cables.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | Antennas
are used to transmit and receive microwave radio signals from and to edge and core
networks. These compact, high-performance devices are mounted on poles typically placed
on rooftops, towers or buildings. We rely on third party vendors to supply this component.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | End-to-End
Network Management. Our network management system uses simple network management protocol
to monitor and control managed devices at both the element and network level and can be
easily integrated into our customers existing network management systems.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

An
antenna, an outdoor unit and an indoor unit comprise a terminal. Two terminals are
required to form a radio link, which typically extends across a distance of several miles
and can extend across a distance of 80 miles or more. The specific distance depends upon
the customers requirements and chosen modulation scheme, the frequency utilized, the
available line of sight, local rain patterns and antenna size. Each link can be controlled
by our network management system or can be interfaced to the network management system of
the service provider. The systems are available in both split-mount, including an indoor
and outdoor unit, and all-indoor installations.

# Our Services

We
are committed to providing high levels of service and implementation support to our
customers. Our sales and network field engineering services personnel work closely with
customers, system integrators and others to coordinate network design and ensure
successful installation of our solutions. We are increasingly engaged in projects in which
we provide the requisite installation, supervision and testing services, either directly
or through subcontractors.

We
support our products with documentation and training courses tailored to our
customers varied needs. We have the capability to remotely monitor the in-network
performance of our products and to diagnose and address problems that may arise. We help
our customers to integrate our network management system into their existing internal
network operations control centers.

# Our Customers

We
have sold our products through a variety of channels to over 150 service providers and the
operators of hundreds of private networks in nearly 100 countries. Our principal customers
are wireless service providers that use our products to expand backhaul network capacity,
reduce backhaul costs and support the provision of advanced telecommunications services.
We reach a number of these customers through our OEM relationships. We also sell systems
to large businesses and public institutions that operate their own private communications
networks through system integrators, resellers and distributors. Our customer base is
diverse in terms of both size and geographical location.

The
following table summarizes the distribution of our revenues by region, stated as a
percentage of total revenues for the year ended December 31, 2008, and the names of
representative customers:

| | Region                         | Year Ended
December 31,
2008 | Representative Customers                                                                                             
| | ------------------------------ | ---------------------------- | ---------------------------------------------------------------------------------------------------------------------
|
|
|
|
| | North America                  | 9%                           | AT&T, CellularOne, Connectronics, Hutton Communications, XO Communications                                           
| | Europe, Middle East and Africa | 31%                          | Belgacom, Elro, KPN                                                                                                  
| | Asia Pacific                   | 52%                          | Bharti Airtel, Digitel Mobile Philippines, IDEA Cellular, Reliance Communications,
 Tata Teleservices, Vodafone Essar
| | Latin America                  | 8%                           | Codetel, Telcel                                                                                                      

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# Sales and Marketing

We
sell our products through a variety of channels, including direct sales, OEMs,
distributors and system integrators. Our sales and marketing staff includes approximately
245 employees in 17 countries, who work together with local agents, distributors and OEMs
to expand our sales.

We
are a supplier to three OEMs, which together accounted for 33.7% of our revenues for the
year ended December 31, 2008. The largest OEM is NSN, with whom we signed an OEM agreement
as of November 2005 following several years of joint sales activities. For the year ended
December 31, 2008, sales to NSN represented 24.2% of our revenues. We plan to increase our
efforts in the development of additional strategic relationships with equipment vendors,
integrators, networking companies and other industry suppliers with the goal of gaining
greater access to our target markets.

Our
marketing efforts include advertising, public relations and participation in industry
trade shows and conferences.

Manufacturing and Assembly

Our
manufacturing process consists of materials planning and procurement, assembly of indoor
units and outdoor units, final product assurance testing, quality control and packaging
and shipping. With the goal of streamlining all manufacturing and assembly processes, we
have implemented an outsourced, just-in-time manufacturing strategy that relies on
contract manufacturers to manufacture and assemble circuit boards and other components
used in our products and to assemble and test indoor units and outdoor units for us. The
use of advanced supply chain techniques has enabled us to reduce our delivery time, while
simultaneously increasing our manufacturing capacity and reducing our manufacturing costs.

We
outsource the majority of our manufacturing operations to major contract manufacturers in
Israel and the Philippines. Our warehouse operations are outsourced to a subcontractor in
Israel. During the second half of 2006, we discontinued our manufacturing operations in
Tel Aviv, Israel as part of the phase-out of our legacy FibeAir 1500 products. The raw
materials for our products come primarily from the United States, Europe and Asia.

We
comply with standards promulgated by the International Organization for Standardization
and have received certification under the ISO 9001, ISO 9002, and ISO 14000 standards.
These standards define the procedures required for the manufacture of products with
predictable and stable performance and quality, as well as environmental guidelines for
our operations.

Our
activities in Europe require that we comply with European Union Directives with respect to
product quality assurance standards and environmental standards. On July 1, 2006, the new
RoHS (Restrictions of Hazardous Substances) Directive took effect, a
development which required us to modify some of our products. In addition, the
WEEE (Waste Electrical and Electronic Equipment) Directive requires producers
of electrical and electronic equipment to register in different European countries and to
provide collection and recycling facilities for used products.

# Research and Development

We
place considerable emphasis on research and development to improve and expand the
capabilities of our existing products, to develop new products, with particular emphasis
on equipment for emerging IP-based networks, and to lower the cost of producing both
existing and future products. We intend to continue to devote a significant portion of our
personnel and financial resources to research and development. As part of our product
development process, we maintain close relationships with our customers to identify market
needs and to define appropriate product specifications. In addition, we intend to continue
to comply with industry standards and, in order to participate in the formulation of
European standards, we are full members of the European Telecommunications Standards
Institute.

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Our
research and development activities are conducted at our facilities in Tel Aviv, Israel.
As of December 31, 2008, our research, development and engineering staff consisted of 127
employees. Our research and development team includes highly specialized engineers and
technicians with expertise in the fields of millimeter wave design, modem and signal
processing, data communications, system management and networking solutions.

Our
research and development department provides us with the ability to design and develop
most of the aspects of our proprietary solutions, from the chip-level, including both
application specific integrated circuits, or ASICs, and radio frequency integrated
circuits, or RFICs, to full system integration. We leverage our research and development
capabilities through the use of specialized outside design firms. Our research and
development projects currently in process include improvements to our existing SONET/SDH
products, extensions to our emerging IP-based networking product lines and development of
new technologies to support future product concepts. In addition, our engineers
continually work to redesign our products with the goal of improving their
manufacturability and testability while reducing costs.

# Intellectual Property

To
safeguard our proprietary technology, we rely on a combination of patent, copyright,
trademark and trade secret laws, confidentiality agreements and other contractual
arrangements with our customers, third-party distributors, consultants and employees, each
of which affords only limited protection. We have a policy which requires all of our
employees to execute employment agreements which contain confidentiality provisions.

We
have registered trademarks as follows:

| |  | for
the standard character mark Ceragon Networks and our logo in the United States, Israel,
and               the European Union;
| | - | ---------------------------------------------------------------------------------------------------------------------------------

| |  | for
the standard character mark Ceragon Networks in Canada;
| | - | -----------------------------------------------------------

| |  | for
our design mark for FibeAir in the United States, Israel and the European Union;
| | - | ------------------------------------------------------------------------------------

| |  | for
the standard character mark FibeAir in the United States;
| | - | -------------------------------------------------------------

| |  | for
the standard character mark CeraView in the United States, Israel and the European Union;
              and
| | - | ---------------------------------------------------------------------------------------------------------------

| |  | For
the standard character mark Native2 in the European Union and in Australia.
| | - | -------------------------------------------------------------------------------

Until
recently, we have not aggressively pursued patent protection and consequently, our patent
portfolio may not be as extensive as those of our competitors. As a result, we may have
limited ability to assert any patent rights in negotiations with, or in counterclaiming
against, competitors who assert intellectual property rights against us. To date, we have
filed one non-provisional patent application and six provisional patent applications to
protect our proprietary intellectual property in the areas of high capacity data
transmission and adaptive modulation radios with native IP and native circuit-switch
capabilities. We cannot assure you that any patents will actually be issued or that the
scope of any issued patent will adequately protect our intellectual property rights.

# Competition

The
market for wireless equipment is rapidly evolving, fragmented, highly competitive and
subject to rapid technological change. We expect competition to persist, intensify and
increase in the future, especially if rapid technological developments occur in the
broadband wireless equipment industry or in other competing high-speed access
technologies.

We
compete with a number of wireless equipment providers in the United States and other
countries that vary in size and in the types of products and solutions they offer. Our
primary competitors include Harris Stratex Networks, Inc., Huawei Technologies Co., Ltd.,
L.M. Ericsson Telephone Company, NEC Corporation (NEC) and Nokia Siemens Networks B.V.
(NSN). In addition to these primary competitors, a number of other communications
equipment suppliers, including Alcatel-Lucent, DragonWave Inc., Nera Networks AS, SIAE
Microelectronica S.p.A. and ZTE Corporation, offer or are developing products that compete
with our products.

24

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We
believe we compete favorably on the basis of:

| |  | product
performance, reliability and functionality;
| | - | ---------------------------------------------------

| |  | range
and maturity of product portfolio, including the ability to provide both circuit switch
and IP solutions and therefore to provide a migration path for circuit-switched to
IP-based networks;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | cost;
and
| | - | ---------

| |  | deployment,
support and technical service and experience and commitment to high quality customer
service.
| | - | ---------------------------------------------------------------------------------------------------------

Our
products also indirectly compete with other high-speed communications solutions, including
fiber optic lines and other wireless technologies.

# Israeli Office of Chief
Scientist

The
Government of Israel encourages research and development projects through the Office of
the Chief Scientist of the Israeli Ministry of Industry, Trade and Labor, or the OCS,
pursuant to the Law for the Encouragement of Industrial Research and Development, 1984,
and the regulations promulgated thereunder, commonly referred to as the R&D Law.

Under
the R&D Law, research and development programs that meet specified criteria and are
approved by the research committee of the OCS are eligible for grants of up to 50% of
certain approved expenditures of such programs, as determined by the research committee of
the OCS. In exchange, the recipient of such grants is required to pay the OCS royalties
from the revenues derived from products incorporating know-how developed within the
framework of each such program or derived from such program (including ancillary services
in connection with such program), usually up to an aggregate of 100% of the dollar-linked
value of the total grants received in respect of such program, plus interest.

In
December 2006, we entered into an agreement with the OCS to conclude our R&D grant
programs sponsored by the OCS. Under the agreement, we were required to repay the OCS
approximately $11.9 million in outstanding grants, in semiannual installments from 2007
through 2009. During the second quarter of 2008, we paid the OCS approximately $7.4
million to retire all the debt remaining from this agreement. We entered into that
agreement because we believed that the accelerating, interest-bearing royalty payments
stemming from growth in our revenues significantly reduced the economic benefit of
participation in such grants.

In
June 2005, an amendment to the R&D Law came into effect, the intent of which was to
make the R&D Law more compatible with the global business environment by, among other
things, relaxing restrictions on the transfer of manufacturing rights outside Israel and
on the transfer of OCS-funded know-how outside of Israel, as further described below.Even though we concluded our participation in the OCS grant program, these
restrictions continue to apply to us.

The
R&D Law generally requires that the product developed under a program be manufactured
in Israel. However, upon the approval of the OCS, some of the manufacturing volume may be
performed outside of Israel, provided that the grant recipient pays royalties at an
increased rate, which may be substantial, and the aggregate repayment amount is increased
up to 300% of the grant, depending on the portion of the total manufacturing volume that
is performed outside of Israel. The 2005 amendment to the R&D Law further permits the
OCS, among other things, to approve the transfer of manufacturing rights outside Israel in
exchange for an import of different manufacturing into Israel as a substitute, in lieu of
the increased royalties.

The
R&D Law also provides that know-how developed under an approved research and
development program may not be transferred to third parties in Israel without the approval
of the research committee. Such approval is not required for the sale or export of any
products resulting from such research or development. The R&D Law further provides
that the know-how developed under an approved research and development program may not be
transferred to any third parties outside Israel, except in certain circumstances and
subject to prior OCS approval. The OCS may approve the transfer of OCS-funded know-how
outside Israel, in the following cases: (a) the grant recipient pays to the OCS a portion
of the sale price paid in consideration for such OCS-funded know-how (according to certain
formulas); or (b) the grant recipient receives know-how from a third party in exchange for
its OCS-funded know-how; or (c) such transfer of OCS-funded know-how arises in connection
with certain types of cooperation in research and development activities.

25

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The
R&D Law imposes reporting requirements with respect to certain changes in the
ownership of a grant recipient. The law requires the grant recipient and its controlling
shareholders and foreign interested parties to notify the OCS of any change in control of
the recipient or a change in the holdings of the means of control of the recipient that
results in a non-Israeli becoming an interested party directly in the recipient and
requires the new interested party to undertake to the OCS to comply with the R&D Law.
In addition, the rules of the OCS may require additional information or representations in
respect of certain of such events. For this purpose, control is defined as the
ability to direct the activities of a company other than any ability arising solely from
serving as an officer or director of the company. A person is presumed to have control if
such person holds 50% or more of the means of control of a company. Means of
control refers to voting rights or the right to appoint directors or the chief
executive officer. An interested party of a company includes a holder of 5% or
more of its outstanding share capital or voting rights, its chief executive officer and
directors, someone who has the right to appoint its chief executive officer or at least
one director, and a company with respect to which any of the foregoing interested parties
owns 25% or more of the outstanding share capital or voting rights or has the right to
appoint 25% or more of the directors. Accordingly, any non-Israeli who acquires 5% or more
of our ordinary shares will be required to notify the OCS that it has become an interested
party and to sign an undertaking to comply with the R&D Law.

C. Organizational Structure

We
are an Israeli company that commenced operations in 1996. The following is a list of our
significant subsidiaries:

|Company                                     | Place of
Incorporation | Ownership
Interest
|------------------------------------------- | ---------------------- | ------------------
|
|
|
|
|Ceragon Networks (Aus) Pty Ltd              | Australia              | 100%              
|Ceragon Networks do Brasil Limitada         | Brazil                 | 100%              
|Ceragon Networks (UK) Limited               | England                | 100%              
|Ceragon Networks SARL                       | France                 | 100%              
|Ceragon Networks (HK) Limited               | Hong Kong              | 100%              
|Ceragon Networks (India) Private Limited    | India                  | 100%              
|Ceragon Networks, S.A. de C.V.              | Mexico                 | 100%              
|Ceragon Networks, Inc.                      | New Jersey             | 100%              
|Ceragon Networks (Nigeria) Limited          | Nigeria                | 100%              
|Ceragon Networks (Philippines), Inc.        | Philippines            | 100%              
|Ceragon Networks APAC (Singapore) Pte. Ltd. | Singapore              | 100%              

# D. Property, Plants and
Equipment

Our
corporate headquarters and principal administrative, finance, sales and marketing, R&D
and operations departments are located at a leased facility of approximately 51,100 square
feet in Tel Aviv, Israel. The leases for the majority of this space are valid until
December 2010, with an option to renew for an additional two-year period.

In
the United States, we lease approximately 5,800 square feet in Paramus, New Jersey, for
our North American headquarters. The lease in Paramus is valid until July 2013. In the
United Kingdom, we lease approximately 2,560 square feet in Birmingham expiring in March
2015. We also lease space for our local subsidiaries to conduct sales and marketing
activities in their respective regions.

|ITEM 4A |  | UNRESOLVED STAFF COMMENTS
|------- |  | -------------------------

Not applicable.

26

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|ITEM 5. |  | OPERATING AND FINANCIAL REVIEW AND PROSPECTS
|------- |  | --------------------------------------------

The
following discussion and analysis should be read in conjunction with our
consolidated financial statements, the notes to those financial statements and
other financial data that appear elsewhere in this annual report. In addition to
historical information, the following discussion contains forward-looking
statements based on current expectations that involve risks and uncertainties.
Actual results and the timing of certain events may differ significantly from those
projected in such forward-looking statements due to a number of factors, including
those set forth in Risk Factors and elsewhere in this annual
report. Our consolidated financial statements are prepared in conformity
with U.S. GAAP.

# Overview

We
are a leading provider of high capacity wireless backhaul solutions that enable wireless
service providers to deliver voice and premium data services, such as Internet browsing,
music and video applications. Our backhaul solutions use microwave technologies to
transfer large amounts of network traffic between base stations and the high capacity
fiber-optic infrastructure at the core of the mobile network. We design our solutions to
provide fiber-like connectivity for circuit-switched (SONET/SDH networks), next generation
Ethernet/Internet Protocol (IP-based networks) and hybrid networks that combine
circuit-switched and IP-based networks. Our solutions support all wireless access
technologies including GSM, CDMA, EV-DO and WiMAX. These solutions address wireless
service providers need to cost-effectively build out and scale their infrastructure
to meet the increasing demands placed on their networks by growing numbers of subscribers
and the increasing demand for premium data services. We also provide our solutions to
businesses and government agencies that operate their own private communications networks.
Our solutions are deployed by more than 150 service providers of all sizes, as well as in
hundreds of private networks, in nearly 100 countries.

We
have grown our revenues from $54.8 million for the year ended December 31, 2004 to $217.3
million for the year ended December 31, 2008, representing a 41% compound annual growth
rate, or CAGR. Our revenues for 2008 represent an increase of 34% compared to our revenues
for 2007. However, during the first quarter of 2009, due to the global economic crisis,
our revenues are projected to be lower than those in the first quarter and last quarters of
2008. In 2008, approximately 31% of our revenues were derived from customers in Europe,
the Middle East and Africa and 52% from customers in Asia Pacific.

# Industry Trends

Market trends have placed, and will
continue to place, pressure on the selling prices for our products and on our gross
margins. The current global economic crisis has created significant challenges to our
attempt to maintain or increase revenues. Our objective is to continue to meet the rising
demand for our solutions while at the same time increasing our profitability. We seek to
achieve this objective by constantly reviewing and improving our execution in, among
others, development, manufacturing and sales and marketing. Set forth below is a more
detailed discussion of the trends affecting our business:

| |  | Challenging
Market Conditions. The current global economic crisis has resulted in a lengthening of
the sales cycles and planned timeline for new customer projects and stretched our
purchasing decisions. Consequently, revenue opportunities have diminished in the short
term, and it will be a challenge to restore revenue growth to the rate experienced in the
recent past.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Growing
Number of Global Wireless Subscribers. Growth in the number of global wireless
subscribers is being driven by the availability of inexpensive cellular phones and more
affordable wireless service, particularly in developing countries and emerging markets,
and is being addressed by expanding wireless networks and by building new networks.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Increasing
Demand for Mobile Data Services. Wireless service providers are facing increasing demand
from subscribers for mobile data services, including Internet browsing, music and video.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Transition
to IP-based Networks. Wireless service providers are beginning to deploy all-IP networks
and upgrade their infrastructure to interface with an IP-based core network in order to
increase network efficiency, lower operating costs and more effectively deliver
high-bandwidth data services.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

27

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---

We
are also experiencing pressure on our sale prices as a result of several factors:

| |  | Increased
Competition: Our target market is characterized by vigorous, worldwide competition for
market share and rapid technological development. These factors have resulted in
aggressive pricing practices and downward pricing pressures, and growing competition from
both start-up companies and well-capitalized telecommunication systems providers.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Regional
Pricing Pressures: In recent years we have increased sales of our products in India and
other parts of Asia in response to the rapid build-out of cellular networks in those
regions. For the years ended December 31, 2006, 2007 and 2008, 30%, 42% and 52%,
respectively, of our revenues were earned in the Asia/Pacific region. Sales of our
products in these markets are generally at lower gross margins in comparison to other
regions.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Transaction
Size: Competition for larger equipment orders is increasingly intense since the number of
large equipment orders in any year is limited. Consequently, we generally experience
greater pricing pressure when we compete for larger orders as a result of this increased
competition and demand from purchasers for greater volume discounts. As an increasing
portion of our revenues is derived from large orders, we believe that our business will
be more susceptible to these pressures.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Sales
through OEMs: Sales through our OEM relationships result in lower gross margins than
sales directly to end-users through distributors and re-sellers. By selling our products
to OEMs, we rely in part on the sales and marketing efforts of the OEMs, as well as on
their post-sale support. For the year ended December 31, 2008, approximately 34% of our
sales was to our three OEMs of wireless equipment, rather than directly to end users. We
anticipate that sales to OEMs will become an increasing part of our business in the
future.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Although
we have successfully reduced the cost of producing our equipment and continue to focus on
operational improvements, these price pressures may have a negative impact on our gross
margins.

As
we continue to expand our geographic footprint, we are increasingly engaged in supplying
installation and other services for our customers, often in developing nations. In this
context, we may act as prime contractor and equipment supplier for network build-out
projects, providing installation, supervision and testing services required for these
projects, or we may provide such services and equipment for projects handled by system
integrators. In such cases, we typically bear the risks of loss and damage and title to
our products until the customer has issued an acceptance certificate upon successful
completion of acceptance tests. If our products are damaged or stolen, or if the network
we install does not pass the acceptance tests, the end user or the system integrator, as
the case may be, could refuse to pay us and we would incur substantial costs, including
fees owed to our installation subcontractors, increased insurance premiums, transportation
costs and expenses related to repairing or manufacturing the products. Moreover, in such a
case, we may not be able to repossess the equipment, thus suffering additional losses.

Finally, although our revenues have
grown rapidly over the last several years, we will not be able to sustain our recent
growth rate in the short term due to the current economic crisis and may not be able to
regain this rate of growth in future periods. You should not rely on our revenue growth in
any prior quarterly or annual period as an indication of our future revenue growth.

# Results of Operations

Revenues.
          We generate revenues primarily from the sale of our products, and, to a lesser
          extent, services. The final price to the customer may vary based on various
          factors, including but not limited to the size of a given transaction, the
          geographic location of the customer, the specific application for which
products           are sold, the channel through which products are sold, the competitive
          environment and the results of negotiation.

Cost
of Revenues. Our cost of revenues consists primarily of the prices we pay contract
manufacturers for the products they manufacture for us, component and material costs,
labor costs, estimated warranty costs, costs related to management of our supply chain,
shipping and, through the end of 2006, royalties to the Israeli Government in connection
with grants we received from the OCS. In addition, we pay fees to subcontractors relating
to installation services with respect to our products.

28

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---

Operating Expenses

Research
and Development Expenses. Our research and development expenses consist primarily of
salaries and related costs for research and development personnel, subcontractors
costs, costs of materials and depreciation of equipment. All of our research and
development costs are expensed as incurred. Through the end of 2006, research and
development expenses were offset by grants from the OCS. We recognized such grants at the
time we were entitled to them on the basis of the costs incurred and included these grants
as a deduction from research and development expenses. We no longer intend to receive
grants from the OCS. We believe continued investment in research and development is
essential to attaining our strategic objectives.

Selling
and Marketing Expenses. Our selling and marketing expenses consist primarily of
compensation and related costs for sales and marketing personnel, trade show and exhibit
expenses, travel expenses, commissions and promotional materials.

General
and Administrative Expenses. Our general and administrative expenses consist primarily of
compensation and related costs for executive, finance and human resources personnel,
professional fees (including legal and accounting fees), insurance, provisions for
doubtful accounts and other general corporate expenses.

Financial
Income, Net. Our financial income, net, consists primarily of interest earned on bank
deposits and marketable securities, gains and losses arising from the remeasurement of
transactions and balances denominated in non-dollar currencies into dollars, gains and
losses from our currency hedging activity and fees and commissions paid to banks.

Taxes.
          Israeli companies are generally subject to corporate tax at the rate of 27% of
          their taxable income in 2008. The rate is scheduled to decline to 26% in 2009
          and 25% in 2010 and thereafter. However, the effective tax rate payable by a
          company that derives income from an approved enterprise designated
          as set forth under the Law for the Encouragement of Capital Investments, 1959,
          or the Investment Law, may be considerably less. As of December 31, 2008, the
          end of our last fiscal year, our net operating loss carry forwards amounted to
          approximately $45.7 million for Israeli tax purposes and $9.7 million for U.S.
          tax purposes.

# Critical Accounting
Policies and Estimates

Our
consolidated financial statements are prepared in accordance with U.S. GAAP. These
accounting principles require management to make certain estimates, judgments and
assumptions based upon information available at the time they are made, historical
experience and various other factors that are believed to be reasonable under the
circumstances. These estimates, judgments and assumptions can affect the reported amounts
of assets and liabilities as of the date of the financial statements, as well as the
reported amounts of revenues and expenses during the periods presented.

Our
management believes the accounting policies that affect its more significant judgments and
estimates used in the preparation of its consolidated financial statements and which are
the most critical to aid in fully understanding and evaluating our reported financial
results include the following:

| |  | Revenue
recognition;
| | - | --------------------

| |  | Inventory
valuation;
| | - | --------------------

| |  | Provision
for doubtful accounts;
| | - | --------------------------------

| |  | Stock-based
compensation expense;
| | - | ---------------------------------

| |  | Deferred
taxes; and
| | - | -------------------

| |  | Marketable
securities.
| | - | ----------------------

29

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Revenue
recognition. We recognize revenue in accordance with SEC Staff Accounting Bulletin No.
104, Revenue Recognition, which is commonly referred to as SAB 104, when
persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or
determinable and collectability is probable. Generally, we do not grant a right of return
to our customers. When a right of return exists, we create a provision for returns in
accordance with Statement of Financial Accounting Standards No. 48, Revenue
Recognition when Right of Return Exists.

When
sale arrangements include a customer acceptance provision, revenue is recognized when
we have demonstrated that the criteria specified in the acceptance provision have been
satisfied. In arrangements which include multiple elements, we consider the sale of
equipment and its installation to be two separate units of accounting in the arrangement
in accordance with EITF 00-21, since the installation is not essential to the
functionality of the equipment, the equipment has value to the customer on a standalone
basis, and fair value of the installation services exists. In such arrangement, revenues
from the sale of equipment are recognized upon delivery, if all other revenue recognition
criteria are met, and we defer the fair value of the installation service (but not less
than the amount contingent upon completion of installation, if any) to the period in which
such installation occurs. Our typical product warranty is between 12 to 36 months at no
extra charge. Factors that affect our warranty liability include the number of installed
units, historical and anticipated rates of warranty claims, and cost per claim. To assess
the probability of collection for revenue recognition purposes, we analyze our historical
collection experience, current economic trends and the financial position of our
customers. On the basis of these criteria, we decide whether revenue recognition should be
deferred and recognized on a cash basis. Deferred revenues include amounts received from
customers for which revenue has not been recognized. We also apply Emerging Issues Task
Force (EITF) 99-19, Reporting Revenues Gross as a Principal versus Net
as an Agent (EITF 99-19), regarding arrangements where we also provide
third party equipment and report revenues gross as a principal.

Inventory
valuation. Our inventories are stated at the lower of cost or market value. Cost is
determined by using the moving average cost method. At each balance sheet date, we
evaluate our inventory balance for excess quantities and obsolescence. This evaluation
includes an analysis of slow-moving items and sales levels by product and projections of
future demand. If needed, we write off inventories that are considered obsolete or
excessive. If future demand or market conditions are less favorable than our projections,
additional inventory write-downs may be required and would be reflected in cost of
revenues in the period the revision is made.

Provision
for doubtful accounts. We perform ongoing credit evaluations of our trade receivables
and maintain an allowance for doubtful accounts, based upon our judgment as to our ability
to collect outstanding receivables. Allowance for doubtful accounts is made based upon a
specific review of all the outstanding invoices. In determining the provisions, we analyze
our historical collection experience, current economic trends, the financial position of
our customers and the payment guarantees (such as letters of credit) that we receive from
our customers. In addition, we include a general provision for doubtful debts based on the
age of the debts and on managements past experience in collecting such receivables.
We also insure certain trade receivables under credit insurance policies. If the financial
condition of our customers deteriorates, resulting in their inability to make payments,
additional allowances might be required. As of December 31, 2008, our allowance for
doubtful accounts was $2.5 million and our trade receivables were $73.3 million.
Historically, our provision for doubtful accounts has been sufficient to account for our
bad debts.

Stock-based
compensation expense. On January 1, 2006, we adopted Statement of Financial Accounting
Standards No. 123 (revised 2004), Share-Based Payment, or SFAS 123(R), which
requires the measurement and recognition of compensation expense based on estimated grant
date fair values for all share-based payment awards made to employees and directors. For
periods beginning in fiscal 2006, SFAS 123(R) supersedes Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, or APB 25, under
which we previously accounted for our share based awards granted to employees and
directors, for periods beginning in fiscal 2006. In March 2005, the SEC issued Staff
Accounting Bulletin No. 107, or SAB 107, relating to SFAS 123(R). We have applied the
provisions of SAB 107 in our adoption of SFAS 123(R).

SFAS
123(R) requires companies to estimate the fair value of equity-based payment awards on the
date of grant using an option-pricing model. The value of the portion of the award that is
ultimately expected to vest is recognized as an expense over the requisite service periods
in our consolidated income statement. Prior to the adoption of SFAS 123(R), we accounted
for equity-based awards to employees and directors using the intrinsic value method in
accordance with APB 25 as allowed under Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation, or SFAS 123.

30

---

---

We
adopted SFAS 123(R) using the modified prospective transition method, which requires the
application of the accounting standard starting from January 1, 2006, the first day of our
fiscal year 2006. Under that transition method, compensation cost recognized in 2006
included compensation cost for all share-based payments that were ultimately expected to
vest (a) based on the grant date fair value estimated in accordance with the original
provisions of SFAS 123 for awards granted prior to, but not yet vested as of January 1,
2006, and (b) based on the grant-date fair value estimated in accordance with the
provisions of SFAS 123(R) for awards granted subsequent to January 1, 2006. Results for
prior periods have not been restated.

We
selected the binomial option pricing model as the most appropriate fair value method for
our share-option awards based on the market value of the underlying shares at the date of
grant. We recognize compensation expenses for the value of our awards, which have graded
vesting, based on the accelerated attribution method over the requisite service period,
net of estimated forfeitures. Estimated forfeitures are based on actual historical
pre-vesting forfeitures and on managements estimates. If actual forfeitures differ
from our estimates, stock-based compensation expense and our results of operations would
be impacted.

Stock-based
compensation expense recognized under SFAS 123(R) was $1.7 million, $1.8 million and $2.6
million for the years ended December 31, 2006, 2007 and 2008, respectively.

Deferred
Taxes. We utilize the liability method of accounting for income taxes. We record a
valuation allowance to reduce our deferred tax assets to the amount that we believe is
more likely than not to be realized. In assessing the need for a valuation allowance, we
consider all positive and negative evidence, including scheduled reversals of deferred tax
liabilities, projected future taxable income, tax planning strategies, and recent
financial performance. Forming a conclusion that a valuation allowance is not required is
difficult when there is negative evidence such as cumulative losses in the past. As a
result of our cumulative losses and the utilization of our loss carryforward
opportunities, we have recorded valuation allowances to reduce our net deferred tax assets
to the amount we believe is more likely than not to be realized. While we have considered
future taxable income and ongoing tax planning strategies in assessing the need for any
valuation allowance, in the event we were to determine that we will be able to realize our
deferred tax assets in the future in excess of the net recorded amount, an adjustment to
the valuation allowance would increase income in the period such a determination is made.
Likewise, should we determine that we would not be able to realize all or part of our net
deferred tax assets in the future, an adjustment to the valuation allowance would be
charged to expenses in the period such a determination is made. During 2008, following our
determination that it is more likely than not that we will be able to realize a portion of
our deferred tax assets, we recorded a tax benefit of approximately $11.4 million.

Marketable
Securities. Based on our intention with respect to a particular investment at the time
of investment, we are generally required to classify our investments under GAAP as
held-to-maturity and to reevaluate this classification each reporting period. The
classification of the investment may affect our reported results. For investments
classified as held-to-maturity, we are required to carry the investment at amortized cost,
with only the amortization occurring during the period recognized into income.

We
periodically review our marketable securities for impairment. If we conclude that any of
these investments are impaired, we determine whether such impairment is
other-than-temporary as defined under FSP 115-1. Factors we consider to make
such a determination include our intent and ability to hold the investment for a period of
time sufficient for any anticipated recovery in market value, the length of time and
extent to which the fair value has been less than its cost basis, the credit ratings of
the securities, the nature of underlying collateral as applicable and the financial
condition and near-term prospects of the issuer. If any impairment is considered
other-than-temporary, we will write down the asset to its fair value and take
a corresponding charge to our Consolidated Statements of Operations.

During
2008, we did not record other-than-temporary impairment of our marketable securities.

31

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# Comparison of Period to
Period Results of Operations

The
following table presents consolidated statement of operations data for the periods
indicated as a percentage of total revenues.

|                                         | Year Ended December 31,
|---------------------------------------- | -----------------------
|
|
|
|
|Revenues                                 |                        
|Cost of revenues                         |                        
|                                         |                        
|Gross profit                             |                        
|                                         |                        
|Operating expenses:                      |                        
|Research and development                 |                        
|Less: Grants and participations          |                        
|                                         |                        
|Research and development, net            |                        
|Selling and marketing                    |                        
|General and administrative               |                        
|Expense in respect of settlement reserve |                        
|                                         |                        
|Total operating expenses                 |                        
|                                         |                        
|Operating income (loss)                  |                        
|Financial income, net                    |                        
|Tax benefit, net                         |                        
|                                         |                        
|Net income (loss)                        |                        
|                                         |                        

Year ended December 31, 2007
compared to year ended December 31, 2008

Revenues.           Revenues
increased from $161.9 million for the year ended December 31, 2007 to           $217.3
million for the year ended December 31, 2008, an increase of $55.4           million, or
34%. This increase was attributable primarily to increased sales of           our
products to wireless service providers, in particular through our OEM           channels,
mainly within the Asia/Pacific region. Revenues in the Asia/Pacific           region
increased to $113.0 million for the year ended December 31, 2008 as           compared to
$68.4 million for the year ended December 31, 2007. The increase in           revenues in
the Asia/Pacific region was primarily due to deployment of new           cellular
networks and the related growth in the number of mobile subscribers in           the
region. As a percentage of revenues, sales in the Asia/Pacific region           increased
to 52% for the year ended December 31, 2008 from 42% for the year           ended
December 31, 2007.

Cost
of Revenues. Cost of revenues increased from $103.4 million for the year ended
December 31, 2007 to $144.6 million for the year ended December 31, 2008, an increase of
$41.2 million, or 40%. This increase was attributable to increased products purchased from
our contract manufacturers in connection with our increased revenues, additional shipping
costs that we incur primarily as part of the turnkey projects in which we are increasingly
engaging and increased sales through our OEM channels that generate lower gross margin
than our direct sales.

Gross
Profit. Gross profit as a percentage of revenues decreased from 36% for the year ended
December 31, 2007 to 33% for the year ended December 31, 2008. The decrease resulted from:

| |  | Sales
to OEMs which have increased from $33.7 million for the year ended December 31, 2007 to
$73.1 million for the year ended December 31, 2008, an increase of $39.4 million, or
117%. These sales generate lower gross margin than our direct sales.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Sales
to customers in Asia Pacific, especially India, have increased. These sales have lower
gross margin than sales in other regions.
| | - | --------------------------------------------------------------------------------------------------------------------------------------

Research
and Development Expenses. Our research and development expenses increased from $15.5
million for the year ended December 31, 2007 to $20.3 million for the year ended December
31, 2008, an increase of $4.8 million, or 31%. The increase in our research and
development expenses was attributable primarily to the increase in salaries paid to our
research personnel and related costs and increase of expenses paid to subcontractors. As a
percentage of revenues, research and development expenses decreased to 9% in the year
ended December 31, 2008 compared to 10% for the year ended December 31, 2007.

32

---

---

Selling
and Marketing Expenses. Selling and marketing expenses increased from $25.3 million
for the year ended December 31, 2007 to $32.3 million for the year ended December 31,
2008, an increase of $7.0 million, or 28%. This increase was attributable primarily to the
salaries and related costs associated with hiring of additional personnel, an increase in
commissions paid to our sales and marketing staff as a result of our increased sales in
the aggregate amount of $5.5 million, and an increase of $1.5 million in office and other
expenses that resulted in part from the opening of additional local sales offices. As a
percentage of revenues, selling and marketing expenses were 15% in the year ended December
31, 2008 and 16% in the year ended December 31, 2007.

General
and Administrative Expenses. General and administrative expenses increased from $5.3
million for the year ended December 31, 2007 to $7.2 million year ended December 31, 2008.
This increase was attributable primarily to accruals made for doubtful debts in an aggregate
amount of $0.8 million and to an increase in expenses related to patent applications,
opening new offices abroad and miscellaneous external services in the amount of $0.5
million. As a percentage of revenues, general and administrative expenses were 3% in each
of the years ended December 31, 2007 and 2008.

Settlement
Reserve. On August 8, 2007, in response to NECs assertion that we have been
using its intellectual property in certain of our products, we made a settlement offer to
NEC in order to fully resolve NECs allegations. This settlement offer included a
lump sum payment of $0.45 million and certain cross-licensing arrangements in
consideration for a release of any potential claim of infringement relating to NECs
allegations. As a result of this offer, we included a settlement reserve expense of $0.45
million in the year ended December 31, 2007.

Financial
Income, Net. Financial income, net increased from $1.2 million for the year ended
December 31, 2007 to $2.2 million for the year ended December 31, 2008, an increase of
$1.0 million, or 83%. As a percentage of revenues, financial income, net increased to 1%
in the year ended December 31, 2008 compared to 0.7% for the year ended December 31, 2007.
Financial income rose because of the interest received on higher cash balances and cash
investments following our offering in November 2007.

Tax
Benefit, Net. For the year ended December 31, 2008, we recorded an income tax benefit,
net of approximately $10.8 million. The benefit was primarily derived from an increase in
deferred income taxes assets reversing valuation allowances on deferred income tax assets
of approximately $11.4 million, offset in part by $0.5 million of current taxes. As a
percentage of revenues, tax benefit, net represent 5% in the year ended December 31, 2008
compared to none for the year ended December 31, 2007.

Net
Income. Net income increased from $13.1 million for the year ended December 31, 2007
to $26.0 million for the year ended December 31, 2008. As a percentage of revenues, net
income increased to 12% for the year ended December 31, 2008 from 8% for the year ended
December 31, 2007.

Year ended December 31, 2006
compared to year ended December 31, 2007

Revenues.           Revenues
increased from $108.4 million for the year ended December 31, 2006 to           $161.9
million for the year ended December 31, 2007, an increase of $53.5           million, or
49%. This increase was attributable primarily to increased sales of           our
products to wireless service providers, in particular through our OEM           channels,
mainly within the Asia/Pacific region. Revenues in the Asia/Pacific           region
increased to $68.4 million for the year ended December 31, 2007 as           compared to
$32.4 million for the year ended December 31, 2006. The increase in           revenues in
the Asia/Pacific region was primarily due to deployment of new           cellular
networks and the related growth in the number of mobile subscribers in           the
region. As a percentage of revenues, sales in the Asia/Pacific region           increased
to 42% for the year ended December 31, 2007 from 30% for the year           ended
December 31, 2006.

Cost
of Revenues. Cost of revenues increased from $80.8 million for the year ended December
31, 2006 to $103.4 million for the year ended December 31, 2007, an increase of $22.6
million, or 28%. This increase was attributable to increased products purchased from our
contract manufacturers in connection with our increased revenues, as well as additional
shipping costs that we incur primarily as part of the turnkey projects in which we are
increasingly engaging.

33

---

---

Gross
Profit. Gross profit as a percentage of revenues increased from 26% for the year ended
December 31, 2006 to 36% for the year ended December 31, 2007. The increase resulted from:

| |  | execution
of our cost reduction plan for our manufactured products;
| | - | -------------------------------------------------------------------

| |  | the
termination, pursuant to our agreement with the OCS, of our payments of royalties to
              the OCS equal to approximately 3% of our sales; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | a
non-recurring expense in 2006 related to the termination of our participation in the OCS
grant program.
| | - | ---------------------------------------------------------------------------------------------------------

These factors were partially offset
by increased revenues from (i) sales to OEMs which have lower gross margin than our direct
sales, (ii) sales to customers in certain Asian countries, especially India, which have
lower gross margins than sales in other regions, and (iii) larger customer orders which
typically involve volume discounts that result in lower gross margins.

Research
and Development Expenses, Net. Our gross research and development expenses increased
from $13.3 million for the year ended December 31, 2006 to $15.5 million for the year
ended December 31, 2007, an increase of $2.2 million, or 17%. The increase in our gross
research and development expenses was attributable primarily to the increase in salaries
paid to our research personnel and related costs. During the year ended December 31, 2006,
$1.5 million in research and development grants from the OCS were credited against our
research and development expenses. During the year ended December 31, 2007, we did not
receive any grants from the OCS. Our net research and development expenses thus increased
from $11.8 million for the year ended December 31, 2006 to $15.5 million for the year
ended December 31, 2007, an increase of $3.7 million, or 31%. As a percentage of revenues,
research and development expenses, net decreased to 10% in the year ended December 31,
2007 compared to 10.9% for the year ended December 31, 2006.

Selling
and Marketing Expenses. Selling and marketing expenses increased from $17.4 million
for the year ended December 31, 2006 to $25.3 million for the year ended December 31,
2007, an increase of $7.9 million, or 45%. This increase was attributable primarily to the
salaries and related costs associated with hiring of additional personnel and an increase
in commissions paid to our sales and marketing staff as a result of our increased sales in
the aggregate amount of $4.4 million, an increase of $ 1.5 million in travel expenses
associated with higher sales and marketing activity and an increase of $ 0.6 million in
third party agents commissions, especially in the Asia/Pacific region. As a
percentage of revenues, selling and marketing expenses were 16% in each of the years ended
December 31, 2006 and 2007.

General
and Administrative Expenses. General and administrative expenses increased from $5.2
million for the year ended December 31, 2006 to $5.3 million year ended December 31, 2007.
As a percentage of revenues, general and administrative expenses decreased to 3% in the
year ended December 31, 2007 compared to 5% for the year ended December 31, 2006.

Settlement
Reserve. On August 8, 2007, in response to NECs assertion that we have been
using its intellectual property in certain of our products, we made a settlement offer to
NEC in order to fully resolve NECs allegations. This settlement offer included a
lump sum payment of $0.45 million and certain cross-licensing arrangements in
consideration for a release of any potential claim of infringement relating to NECs
allegations. As a result of this offer, we accrued a settlement reserve expense of $0.45
million for the year ended December 31, 2007.

Financial
Income, Net. Financial income, net decreased from $1.3 million for the year ended
December 31, 2006 to $1.2 million for the year ended December 31, 2007, a decrease of $0.1
million, or 8%. As a percentage of revenues, financial income, net decreased to 0.7% in
the year ended December 31, 2007 compared to 1% for the year ended December 31, 2006.

Net
Income (Loss). Our net income for the year ended December 31, 2007 was $13.1 million
as compared to a net loss for the year ended December 31, 2006 of $5.5 million. The change
from net loss in 2006 to net income in 2007 was attributable primarily to a non-recurring
expense in 2006 related to the termination of our participation in the OCS grant program
in the amount of $10.4 million. As a percentage of revenues, net income was 8.1% for the
year ended December 31, 2007.

34

---

---

# Impact of Inflation and
Currency Fluctuations

We
typically derive the majority of our revenues in U.S. dollars. Although the majority of
our revenues were denominated in U.S. dollars, a significant portion of our expenses were
denominated in Israeli shekels and to a significantly lesser extent in Euros. Our
shekel-denominated expenses consist principally of salaries and related personnel
expenses. We anticipate that a material portion of our expenses will continue to be
denominated in shekels. Transactions and balances in currencies other than U.S. dollars
are remeasured into U.S. dollars according to the principles in Financial Accounting
Standards Board Statement No. 52. Gains and losses arising from remeasurement are recorded
as financial income or expense, as applicable.

The
dollar cost of our operations is influenced by the extent that any inflation in Israel is
or is not offset, or is offset on a lagging basis, by the devaluation of the NIS in
relation to the dollar. A devaluation of the NIS in relation to the dollar has the effect
of reducing the dollar amount of our expenses that are payable in NIS, unless those
expenses or payables are linked to the dollar. Conversely, any increase in the value of
the NIS in relation to the dollar has the effect of increasing the dollar value of our
unlinked NIS expenses. Unless offset by a devaluation of the NIS, inflation in Israel will
have a negative effect on our results.

The
following table presents information about the rate of inflation in Israel and the
exchange rate of the NIS against the dollar:

|Year ended December 31, | Israeli inflation
rate % | NIS devaluation
(appreciation) %
|----------------------- | ------------------------ | --------------------------------
|
|
|
|
|2004                    |                          |                                 
|2005                    |                          |                                 
|2006                    |                          |                                 
|2007                    |                          |                                 
|2008                    |                          |                                 

Part
of our revenues and expenses in Europe are received or incurred in Euros. We are exposed
to the risk of an appreciation of the Euro if our expenses in Euros exceed our sales in
Euros. In addition, if the Euro devaluates relative to the dollar and sales in Euros
exceed expenses incurred in Euros, our operating profit may be negatively affected as a
result of a decrease in the dollar value of our sales.

Since
exchange rates between the NIS and the dollar, and between the Euro and the dollar,
fluctuate continuously, exchange rate fluctuations would have an impact on our results and
period-to-period comparisons of our results. We reduce this currency exposure by entering
into hedging transactions. The effects of foreign currency re-measurements are reported in
our consolidated financial statements of operations. For a discussion of our hedging
transactions, please see Item 11. Quantitative and Qualitative
Disclosures about Market Risk.

# Effects of Government
Regulations and Location on the Companys Business

For
a discussion of the effects of Israeli governmental regulation and our location in Israel
on our business, see Information on the Company  Business Overview 
Conditions in Israel in Item 4 and the Risks Relating to our Location in
Israel in Item 3, above.

# Liquidity and Capital
Resources

Since
our initial public offering in August 2000, we have financed our operations primarily
through the proceeds of that initial public offering and a follow-on offering and through
royalty-bearing grants from the OCS. In the initial public offering, we raised $97.8
million; and through December 31, 2006, we received a total of $18.5 million from the OCS.
In a follow-on public offering completed in December 2007, we raised a net amount of $88.3
million.

As
of December 31, 2008, we had approximately $97.8 million in cash and cash equivalents,
short- and long-term bank deposits, and short- and long-term marketable securities.

35

---

---

As
of December 31, 2008, our cash investments were comprised of the following: 29% consisted
of short-term, highly liquid investments with original maturities of up to three months,
and 38% consisted of short-term deposits and marketable securities with original
maturities of up to one year, with a minimum credit rating of A1/P1. The remaining balance
of our liquid assets is invested in corporate debt securities and in bank deposits with
maturities of up to three years, carrying a minimum rating of AA-/AA3. Substantially all
of these investments are in US dollars.

Net
cash used in operating activities was approximately $11.5 million for the year ended
December 31, 2008, $4.3 million for the year ended December 31, 2007 and $4.4 million for
the year ended December 31, 2006. In 2008, our cash used in operating activities was
affected by:

| |  | a
$30.3 million increase in trade receivables, which was primarily attributable to our
increased revenues;
| | - | ----------------------------------------------------------------------------------------------------------

| |  | a
$11.4 million increase in a deferred income tax asset, which was attributable to the
creation for the first time of the deferred tax asset.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------

| |  | a
$3.4 million increase in inventories, which was primarily attributable to an increase in
finished goods; and
| | - | --------------------------------------------------------------------------------------------------------------

| |  | a
$5.3 million decrease in other accounts payable and accrued expenses, which was primarily
attributable to the retirement of the remaining debt to the OCS from the agreement
reached in December 2006 and, in addition, a $4.7 million decrease in long term payables
as a result of retiring such debt. The total payment to the OCS was in the amount of $9
million.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

These
factors were partially offset by:

| |  | our
net income of $26.0 million; and
| | - | ------------------------------------

| |  | a
$13.9 million increase in trade payables, which was primarily attributable to growth in
the volume of our sales and related purchases of products from our contract manufacturers.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In
2007, our cash used in operating activities was affected by:

| |  | a
$13.1 million increase in trade receivables, which were primarily attributable to our
increased revenues;
| | - | -----------------------------------------------------------------------------------------------------------

| |  | a
$9.5 million increase in inventories, which was primarily attributable to an increase in
finished goods;
| | - | ----------------------------------------------------------------------------------------------------------

| |  | a
$3.7 million increase in other accounts receivables and prepaid expenses, which was
primarily attributable to an increase in prepaid expenses mainly related to deferred
revenues from turnkey projects; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | a
$3.3 million decrease in other long-term payables as a result of two installment payments
to the OCS pursuant to the termination of the OCS grant program.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------

These
factors were partially offset by:

| |  | our
net income of $13.1 million;
| | - | --------------------------------

| |  | a
$4.2 million increase in trade payables, which was primarily attributable to growth in
the volume of our sales and related purchases of products from our contract manufacturers;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | a
$2.4 million increase in other accounts payable and accrued expenses, which was primarily
attributable to employee accruals; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------

| |  | a
$3.0 million increase in deferred revenues, which were primarily attributable to
increased advance payments from customers received as a result of our increasing
participation in turnkey projects.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

36

---

---

In
2006, our cash used in operating activities was affected by:

| |  | our
net loss of $5.5 million;
| | - | -----------------------------

| |  | a
$12.4 million increase in trade receivables which was primarily attributable to our
              increased revenues; and
| | - | ---------------------------------------------------------------------------------------------------------------------------

| |  | a
$11.2 million increase in inventories which was primarily attributable to an increase in
finished goods.
| | - | ----------------------------------------------------------------------------------------------------------

These
factors were partially offset by:

| |  | a
$9.8 million increase in trade payables which was primarily attributable to growth in the
volume of our sales and related purchases of products from our contract manufacturers; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | a
$7.9 million increase in long-term payables attributable to our termination of the OCS
grant program.
| | - | -------------------------------------------------------------------------------------------------------

Net
cash used in investing activities was approximately $11.3 million for the year ended
December 31, 2008, as compared to net cash used in investing activities of approximately
$45.9 million for the year ended December 31, 2007 and net cash provided by investing
activities of approximately $2.1 million for the year ended December 31, 2006. In the year
ended December 31, 2008, our investments of $66.3 million in short-term and long-term bank
deposits and $14.9 million in held to maturity marketable securities were partially offset
by the proceeds of $13.5 million from held-to-maturity marketable securities and proceeds
of $61.4 million from maturity of short- and long-term bank deposits. In addition, there
was a purchase of property and equipment in a net amount of $5 million. In the year ended
December 31, 2007, the proceeds of $8.6 million from held-to-maturity marketable
securities and proceeds of $6.2 million from maturity of short- and long-term bank
deposits were offset by our investments of $35.7 million in short-term and long-term bank
deposits and $22.2 million in held to maturity marketable securities. These investments
were attributable to the proceeds from the follow-on public offering completed in November
2007. In addition, there was a purchase of property and equipment in a net amount of $2.9
million. In the year ended December 31, 2006, our cash generated from investing activities
resulted from $3.6 million in proceeds from maturities of short-term and long-term bank
deposits and $5.5 million in proceeds from held-to-maturity marketable securities which
were partially offset by investments in short-term and long-term bank deposits in the
amount of $2.5 million, investments in held-to-maturity marketable securities in the
amount of $3.1 million and the purchase of property and equipment in the amount of $1.4
million.

Net
cash used in financing activities was approximately $7.6 million for the year ended
December 31, 2008 as compared to net cash provided by financing activities of $98.7
million for the year ended December 31, 2007 and net cash provided by financing activities
of $2.1 million for the year ended December 31, 2006. For the year ended December 31,
2008, the Company used an amount of $7.9 million to purchase treasury shares as part of
the Companys share repurchase program. For the year ended December 31, 2007, a net
amount of $88.7 million consisted of the net proceeds of the issuance of shares in a
follow-on public offering. The balance of the cash as of December 31, 2007 and 2006
consisted of proceeds from exercises of share options by employees.

As
of December 31, 2008, our principal commitments consisted of $7.9 million for obligations
outstanding under non-cancelable operating leases.

In
October 2008, we announced the adoption a share repurchase program under which under which
the total amount to be paid for the repurchase of shares would not exceed $20 million. As
of December 31, 2008, we had purchased 1,499,803 shares at a weighted average price per
share of approximately $5.28 per share.

Our
capital requirements are dependent on many factors, including working capital requirements
to finance the growth of the Company, the level of our gross profit and the allocation of
resources to our research and development efforts, as well as our marketing and sales
activities. We anticipate that our capital expenditures during 2009 will be primarily for
the purchase of testing equipment and office equipment.

We
believe that current cash and cash equivalent balances, short-term bank deposits and
short-term marketable securities will be sufficient for our requirements through at least
the next 12 months.

37

---

---

# Research and Development

We
place considerable emphasis on research and development to improve and expand the
capabilities of our existing products, to develop new products, with particular emphasis
on equipment for emerging IP-based networks, and to lower the cost of producing both
existing and future products. We intend to continue to devote a significant portion of our
personnel and financial resources to research and development. As part of our product
development process, we maintain close relationships with our customers to identify market
needs and to define appropriate product specifications. In addition, we intend to continue
to comply with industry standards and, in order to participate in the formulation of
European standards, we are full members of the European Telecommunications Standards
Institute.

Our
research and development activities are conducted at our facilities in Tel Aviv, Israel.
As of December 31, 2008, our research, development and engineering staff consisted of 127
employees. Our research and development team includes highly specialized engineers and
technicians with expertise in the fields of millimeter wave design, modem and signal
processing, data communications, system management and networking solutions.

Our
research and development department provides us with the ability to design and develop
most of the aspects of our proprietary solutions, from the chip-level, including both
ASICs and RFICs, to full system integration. We leverage our research and development
capabilities through the use of specialized outside design firms. Our research and
development projects currently in process include improvements to our existing SONET/SDH
products, extensions to our emerging IP-based networking product lines and development of
new technologies to support future product concepts. In addition, our engineers
continually work to redesign our products with the goal of improving their
manufacturability and testability while reducing costs.

# Intellectual Property

See:
Item 4. History and Development of the CompanyIntellectual Property.

# Off Balance Sheet
Arrangements

We
are not party to any material off-balance sheet arrangements. In addition, we have no
unconsolidated special purpose financing or partnership entities that are likely to create
material contingent liabilities.

# Tabular Disclosure of
Contractual Obligations

|                             | Payments due by period (in thousands of dollars)
|---------------------------- | ------------------------------------------------
|
|
|
|
|Operating lease obligations1 |                                                 
|Purchase obligations2        |                                                 
|Other long-term commitment3  |                                                 
|                             |                                                 
|                             |                                                 
|Total                        |                                                 

---

|(1) | Consists
of operating leases for our facilities and for vehicles.
|--- | -----------------------------------------------------------------

|(2) | Consists
of all outstanding purchase orders for our products from our suppliers.
|--- | --------------------------------------------------------------------------------

|(3) | Our
obligation for accrued severance pay under Israels Severance Pay Law
               as of December 31, 2008 was approximately $6.6 million, of which
approximately                $4.1 million was funded through deposits in severance pay
funds, leaving a net                obligation of approximately $2.6 million.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

38

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# New Accounting
Pronouncements

In
December 2007, the FASB issued SFAS No. 141 (Revised) Business Combinations.
SFAS 141 (Revised) replaces SFAS 141 Business Combinations and establishes
principles and requirements for how the acquirer of a business recognizes and measures in
its financial statements the identifiable assets acquired, the liabilities assumed, and
any noncontrolling interest in the acquiree. The statement also provides guidance for
recognizing and measuring the goodwill acquired in the business combination and determines
what information to disclose to enable users of the financial statements to evaluate the
nature and financial effects of the business combination. The guidance will become
effective for the fiscal year beginning after December 15, 2008. We do not expect that
SFAS 141 (Revised) will have any impact on our historical financial statements upon
adoption.

In
December 2007, the FASB issued SFAS 160, Noncontrolling Interests in Consolidated
Financial Statements. SFAS 160 amends Accounting Research Bulletin 51, Consolidated
Financial Statements, to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It
also clarifies that a noncontrolling interest in a subsidiary is an ownership interest in
the consolidated entity that should be reported as equity in the consolidated financial
statements. SFAS 160 also changes the way the consolidated income statement is presented
by requiring consolidated net income to be reported at amounts that include the amounts
attributable to both the parent and the noncontrolling interest. It also requires
disclosure, on the face of the consolidated statement of income, of the amounts of
consolidated net income attributable to the parent and to the noncontrolling interest.
SFAS 160 requires that a parent recognize a gain or loss in net income when a subsidiary
is deconsolidated and requires expanded disclosures in the consolidated financial
statements that clearly identify and distinguish between the interests of the parent
owners and the interests of the noncontrolling owners of a subsidiary. SFAS 160 is
effective for fiscal periods, and interim periods within those fiscal years, beginning on
or after December 15, 2008. We do not expect that SFAS 160 will have any impact on our
historical financial statements upon adoption.

In
February 2008, the FASB issued FSP No. FAS 140-3, Accounting for Transfers of
Financial Assets and Repurchase Financing Transactions (FSP 140-3). FSP
140-3 concludes that a transferor and transferee should not separately account for a
transfer of a financial asset and a related repurchase financing unless (a) the two
transactions have a valid and distinct business or economic purpose for being entered into
separately and (b) the repurchase financing does not result in the initial transferor
regaining control over the financial asset. FSP 140-3 is effective for financial
statements issued for fiscal years beginning on or after November 15, 2008, and interim
periods within those fiscal years. The adoption of FSP 140-3 is not expected to have a
material effect on the Companys results of operations or financial position.

In
February 2008, the FASB issued FSP No. FAS 157-1, Application of FASB Statement No.
157 to FASB Statement No. 13 and Other Accounting Pronouncements that Address Fair Value
Measurements for Purposes of Lease Classification or Measurement under Statement 13",
and FSP No. FAS 157-2, Effective Date of FASB Statement No. 157". Collectively,
the Staff Positions defer the effective date of Statement 157 to fiscal years beginning
after November 15, 2008 for nonfinancial assets and nonfinancial liabilities except for
items that are recognized or disclosed at fair value on a recurring basis at least
annually, and amend the scope of Statement 157.

In
March 2008, the FASB issued Statement 161 Disclosures about Derivative Instruments
and Hedging Activities (SFAS 161), an amendment to FASB No. 133. This
statement changes the disclosure requirements for derivative instruments and hedging
activities. Entities are required to provide enhanced disclosures about (a) how and why an
entity uses derivative instruments, (b) how derivative instruments and related hedged
items are accounted for under Statement 133 and its related interpretations, and (c) how
derivative instruments and related hedged items affect an entitys financial
position, financial performance, and cash flows. This statement is effective for financial
statements issued for fiscal years and interim periods beginning after November 15, 2008.
Early application is encouraged. We do not expect the adoption of SFAS 161 will have a
material impact on our consolidated financial position, results of operations or cash
flows.

In
May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles. SFAS 162 identifies the sources of accounting principles and
the framework for selecting the principles to be used in the preparation of financial
statements of nongovernmental entities that are presented in conformity with generally
accepted accounting principles in the United States. SFAS 162 became effective in November
2008. The adoption of this statement is not expected to have a material effect on our
financial statements.

39

---

---

|ITEM 6. |  | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
|------- |  | ------------------------------------------

# Directors and Senior
Management

The
following table lists our current directors and senior management:

|Name           | Age |  | Position                                            
|-------------- | --- |  | ----------------------------------------------------
|
|
|
|
|Zohar Zisapel  | 60  |  | Chairman of the Board of Directors                  
|Ira Palti      | 51  |  | President and Chief Executive Officer               
|Naftali Idan   | 57  |  | Executive Vice President and Chief Financial Officer
|Hillik Rave    | 57  |  | Executive Vice President, Worldwide Operations      
|Eran Westman   | 38  |  | Executive Vice President, Worldwide Sales           
|Sharon Ganot   | 40  |  | Vice President, Human Resources                     
|Udi Gordon     | 42  |  | Vice President, Business Development                
|Norman Kotler  | 57  |  | General Counsel and Corporate Secretary             
|Aviv Ronai     | 40  |  | Chief Marketing Officer                             
|Hagai Zyss     | 37  |  | Vice President, Research and Development            
|Joseph Atsmon  | 60  |  | Director                                            
|Yael Langer    | 44  |  | Director                                            
|Yair E. Orgler | 69  |  | Director                                            
|Avi Patir      | 60  |  | Director                                            

Zohar
Zisapel has served as the Chairman of our board of directors since we were
incorporated in 1996. Mr. Zisapel is also a founder and a director of RAD Data
Communications Ltd., of which he served as CEO from January 1982 until January 1998 and
has served as chairman since 1998. Mr. Zisapel serves as chairman of two other public
companies  RADVision Ltd. and RADCOM Ltd.  and as chairman or director of
several private companies. Since July 2008, Mr. Zisapel has been a director of Amdocs
Limited, a public company. Mr. Zisapel previously served as head of the electronics
research and development department in the Israeli Ministry of Defense. Mr. Zisapel
received a B.Sc. and an M.Sc. in electrical engineering from the Technion, Israel
Institute of Technology and an M.B.A. from Tel Aviv University.

Ira
Palti has been our President and Chief Executive Officer since August 2005. From
January 2003 to August 2005, Mr. Palti was Chief Executive Officer of Seabridge Ltd., a
Siemens company that is a global leader in the area of broadband services and networks.
Prior to joining Seabridge, he was the Chief Operating Officer of VocalTec Communications
Ltd., responsible for sales, marketing, customer support and product development. Among
the positions he held before joining VocalTec was founder of Rosh Intelligent Systems, a
company providing software maintenance and AI diagnostic solutions and one of the first
startups in Israel. Mr. Palti received a B.Sc. in mathematics and computer science (magna
cum laude) from Tel Aviv University.

Naftali
Idan has served as our Executive Vice President and Chief Financial Officer since
August 2004. Prior to joining Ceragon, Mr. Idan was Senior Vice President, Chief Financial
Officer at Floware Wireless Systems Ltd. from 2000 to 2001. From 1993 to 1999, he was the
Executive Vice President and Chief Financial Officer of Tecnomatix Technologies Ltd. Prior
to joining Tecnomatix, Mr. Idan was with Optrotech Ltd. from 1985 to 1992, where he held
several positions in finance, the last one being Vice President, Finance &
Administration of its US subsidiary. Prior to that, Mr. Idan served in various financial
roles in both US and Israeli firms. Mr. Idan received a B.A. in accounting and economics
from Tel Aviv University and an M.B.A. from De Paul University in Chicago, and is a
certified public accountant in Israel.

Hillik
Rave has served as our Executive Vice President, Worldwide Operations since December
2005. Prior to joining the Company, Mr. Rave served as Vice President of Operations &
Engineering at ECI Telecom Ltd. in its Optical Networks Division from 2000 to 2005. From
1996 to 2000 he served as Associate Vice President Commercial at ECI Telecom. Prior to
joining ECI Telecom, he held management positions at Telrad, Rabintex, Scitex and ATA from
1985 to 1996. Mr. Rave received a B.A. in industrial engineering and an M.B.A. in business
and industrial management from Ben-Gurion University.

40

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Eran
Westman has served as our Executive Vice President, Worldwide Sales since October
2008. From January 2004 to September 2008, Mr. Westman served as President Asia Pacific,
and from July 2001 to December 2003, he was Vice President Sales for Europe, the Middle
East and Africa. Prior to joining Ceragon, Mr. Westman served from 1991 to 1996 in the
electronic research and development department of the Israeli Ministry of Defense. Mr.
Westman holds a LL.B degree from the Herzog Faculty of Law at Bar Ilan University.

Sharon
Ganot has served as our Vice President, Human Resources since March 2000. From
December 1999 until March 2000, Ms. Ganot was the manager of our human resources
department. From April 1994 until December 1999, she was a personnel recruiter and
training manager with RAD Data Communications Ltd. Ms. Ganot received a B.A. in psychology
and an M.A. in industrial studies from Tel Aviv University.

Udi
Gordon has served as our Vice President, Business Development since October 2008. From
2003 to 2008, Mr. Gordon headed our research and development department, his most recent
position being Executive Vice President R&D. From 1997 until June 2003, he served as a
senior manager in our research and development department. From 1990 until 1997, Mr.
Gordon served in the electronic research and development department in the Israeli
Ministry of Defense. Mr. Gordon received a B.Sc. in electrical engineering from the
Technion, Israel Institute of Technology (cum laude) and an M.B.A. from Bar-Ilan
University.

Norman
Kotler has served as our General Counsel and Corporate Secretary since August 2004.
Prior to joining Ceragon, Mr. Kotler was General Counsel and Corporate Secretary at
Sapiens International Corporation (2003-2004) and Aprion Digital Ltd. (2001-2003). From
1989 to 2001, Mr. Kotler was the chief legal advisor at ECI Telecom Ltd., his last
position there being Associate Vice President, Legal Affairs and Corporate Secretary.
Before joining ECI Telecom, Mr. Kotler was associated with law firms in Israel and in
Phoenix, Arizona. Mr. Kotler received a J.D. from University of Arizona, an M.A. in
history from University of Toronto and a B.A. in history (summa cum laude) from York
University (Toronto).

Aviv
Ronai has served as our Chief Marketing Officer since October 2006. From January 1998
to October 2006, Mr. Ronai held several senior marketing positions at ECI Telecom Ltd.,
the last one being Vice President of Marketing and Communications. From 1991 to 1997 he
served in the Israeli Air Force as a telecommunication officer and project manager. Mr.
Ronai received a B.Sc. in electrical and electronics engineering and an M.B.A. from
Tel-Aviv University.

Hagai
Zyss has served as our Vice President, Research and Development since October 2008.
Previously, Mr. Zyss served in our research and development from June 2000, his most
recent position being Vice President Next Generation Networks. Prior to joining Ceragon,
Mr. Zyss served from 1993 to 2000 in the electronic research and development department of
the Israeli Ministry of Defense. Mr. Zyss received B.Sc. and M.Sc. degrees (cum laude) in
electrical engineering and electronics from Tel-Aviv University.

Joseph
Atsmon has served as a director since July 2001. Mr. Atsmon has also served as a
director of Nice Systems Ltd. since July 2001 and of RADVision Ltd. since June 2003. From November 2005 until  December 2008, Mr. Atsmon was a director of VocalTec Communications Ltd.. From
April 2001 until October 2002, he served as Chairman of Discretix Ltd. From 1995 until
2000, he served as Chief Executive Officer of Teledata Communications Ltd., a public
company acquired by ADC Telecommunications Inc. in 1998. From 1986 until 1995, Mr. Atsmon
served in various positions at Tadiran Ltd., among them a division president and Corporate
Vice President for business development. Mr. Atsmon received a B.Sc. in electrical
engineering (summa cum laude) from the Technion, Israel Institute of Technology. Mr.
Atsmon is one of our independent directors for the purposes of the Nasdaq Marketplace
Rules (the Nasdaq Rules) and is our audit committee chairman and financial
expert.

Yael
Langer has served as a director since December 2000. Ms. Langer served as our general
counsel from July 1998 until December 2000. Ms. Langer is General Counsel and Secretary of
RAD Data Communications Ltd. and other companies in the RAD-BYNET group. From December
1995 to July 1998, Ms. Langer served as Assistant General Counsel to companies in the
RAD-BYNET group. From September 1993 until July 1995, Ms. Langer was a member of the legal
department of Poalim Capital Markets and Investments Ltd. Ms. Langer received an LL.B.
from the Hebrew University in Jerusalem.

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Yair
E. Orgler has served as a director since March 2007. Prof. Orgler is Professor
Emeritus at the Leon Recanati Graduate School of Business Administration, Tel Aviv
University (the Recanati School). From 1996 to June 2006, Prof. Orgler was
Chairman of the Board of the Tel-Aviv Stock Exchange. From 2001 to 2004, he was President
of the International Options Markets Association (IOMA). Prof. Orgler serves as a director
at Bank Hapoalim, B.M., Israel Chemicals Ltd., Atidim-High Tech Industrial Park Ltd.,
ICL-IP Co. Ltd., ICL-IP Ltd., Itamar Medical Ltd. and Gazit-Globe Ltd. Other public
positions held by Prof. Orgler in recent years include: Founder and Chairman of
Maalot, Israels first securities rating company; Chairman of the Wage
Committee of the Association of University Heads in Israel; Chairman of the Executive
Council of the Academic College of Tel-Aviv-Yaffo; and member of the Board of the United
States-Israel Educational Foundation (USIEF). Previous academic positions held by Prof.
Orgler include: Vice Rector of Tel-Aviv University and before that Dean of the Recanati
School. For over 20 years he was the incumbent of the Goldreich Chair in International
Banking at Tel-Aviv University and served frequently as a Visiting Professor of Finance at
the Kellogg Graduate School of Management, Northwestern University. Prof. Orgler holds a
Ph.D. and Masters degree in business administration from Carnegie Mellon University,
an M.Sc. in industrial engineering from University of Southern California and a B.Sc. in
industrial engineering from the Technion. Prof. Orgler is one of our independent directors
for the purposes of the Nasdaq Rules and one of our external directors for purposes of the
Companies Law.

Avi
Patir has served as a director since March 2007. Mr. Patir is President for Mobile
Broadband (WiMAX) at MIRS Communications Ltd., a wholly-owned subsidiary of Motorola
Israel Ltd. From 2004 to 2006, Mr. Patir served as the Group COO and Head of the Wireline
Division of Bezeq  The Israel Telecommunication Corp. Limited
(Bezeq), Israels national telecommunications provider. From 2003 to
2004, Mr. Patir was President and CEO of American Israel Paper Mills Ltd., the leading
Israeli manufacturer and marketer of paper and paper products. From 1996 to 2003, he was
the President and CEO of Barak International Telecommunication Corporation Ltd., a leading
provider of international telecommunications services in Israel, and from 1992 to 1996, he
was Executive Vice President Engineering and Operations at Bezeq. Prior to that, Mr. Patir
served for many years in the Israeli Defense Forces, retiring as a full Colonel. Mr. Patir
has been a board member of, among others, Bezeq International, Pelephone Communications
Ltd. and Satlink Communications Ltd. Mr. Patir holds an M.Sc. in electrical and electronic
engineering from Columbia University and a B.Sc. in electrical and electronic engineering
from the Technion. He is, in addition, a graduate of the Kellogg-Recanati executive
management program. Mr. Patir is one of our independent directors for the purposes of the
Nasdaq Rules and one of our external directors for purposes of the Companies Law.

# Compensation of
Directors and Senior Management

The
following table presents all compensation we paid to all of our directors and senior
management as a group for the year ended December 31, 2008. The table does not include any
amounts we paid to reimburse any of such persons for costs incurred in providing us with
services during this period.

|                                                                         | Salaries, fees,
commissions and
bonuses | Pension,
retirement and
other similar
benefits
|------------------------------------------------------------------------ | --------------------------------------- | ----------------------------------------------
|
|
|
|
|All directors and senior management as a group, consisting of 14 persons |                                         |                                               

During
2008, we granted to our directors and senior management 400,000 options to purchase
ordinary shares, in the aggregate, with exercise prices of $5.10 and $9.09 per share. The
options expire 10 years after grant.

Other
than payment of fees to our external directors as required by the Companies Law,
reimbursement for expenses and the award of stock options, we do not compensate our
directors for serving on our board of directors. For more information, please see
Remuneration of Directors and The 2003 Share Option Plan below and
Note 9 to our Consolidated Financial Statements included as Item 18 in this annual report.

# Board Practices

Our
Articles of Association authorize our board of directors to consist of a minimum of five
and a maximum of nine members. Our board of directors presently consists of five members.
The board retains all the powers in running our company that are not specifically granted
to the shareholders. The board may make decisions to borrow money for our company, and may
set aside reserves out of our profits, for whatever purposes it thinks fit.

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The
board may pass a resolution when a quorum is present, and each resolution must be passed
by a vote of at least a majority of the directors present when the resolution is put to
vote and voting thereon. According to our Articles of Association, unless otherwise
unanimously decided by our board of directors, a quorum of directors is at least a
majority of the directors then in office (but not less than two directors). Our board of
directors may elect one director to serve as the chairman of the board to preside at the
meetings of the board of directors, and may also remove such director as chairman. Minutes
of the meetings are recorded and kept at our offices.

Terms of Directors

Our
Articles of Association provide that directors, other than our external directors
described below, are elected at our annual general meeting of shareholders by a vote of
the holders of a majority of the voting power represented at that meeting and voting
thereon. In accordance with the provisions of the Companies Law, each of our external
directors, as further described below, serves a three-year term, which may be extended by
additional three-year terms. At the annual general meeting of shareholders in September
2004, our Articles of Association were amended to provide for a classified board of
directors. The board of directors is presently divided into two classes: Class I and Class
II. Each director (other than an external director), when and however elected, will be
designated as a member of one of the two classes of directors. The director (other than a
director elected to fill a vacancy as permitted under our Articles of Association) will
serve for a term ending on the date of the third annual general meeting following the
annual general meeting at which such director was elected. Ms. Langer is currently our
Class I director, serving for a term ending at the 2011 annual general meeting. Messrs.
Zisapel and Atsmon are currently our Class II directors, serving for a term ending at the
2009 annual general meeting of the shareholders.

If
any directors are appointed by the board of directors to fill any vacancy, their
appointment must be ratified by the shareholders at the next shareholders meeting
following the appointment. Our shareholders may remove a director from office, in certain
circumstances subject to the Companies Law. There is no requirement that a director own
shares of our company. Directors may appoint alternative directors in their stead,
provided that an external director may appoint an alternate director only for a committee
of the board of directors on which the appointing external director serves, and provided
further that the alternate director so appointed is an external director who has either
accounting and financial expertise or professional qualifications
in accordance to the qualification of the appointing external director and that such
alternate director does not already serve as a member of that committee.

According
to an amendment to the Companies Law adopted in 2008, a person who does not possess the
skills required and the ability to devote the appropriate time to the performance of the
office of director in a company, taking into consideration, among other things, the
special requirements and size of that company, shall neither be appointed as director nor
shall serve as director in a public company. A public company shall not summon a general
assembly whose agenda includes the appointment of a director, and a director shall not be
appointed, unless the candidate has submitted a declaration that he or she possesses the
skills required and the ability to devote the appropriate time to the performance of the
office of director in the company, that sets forth the aforementioned skills and that
states that the limitations set forth in the Companies Law regarding the appointment of a
director do not apply in respect of such candidate.

A
director who ceases to possess any qualification required under the Companies Law for
holding the office of director or who becomes subject to any ground for termination of
his/her office must inform the company immediately and his/her office shall terminate on
such notice.

As
a company organized in Israel whose ordinary shares are listed for quotation on the Nasdaq
Global Market, we are required to comply with the rules of the SEC and the Nasdaq Rules
applicable to listed companies, as well as with the Companies Law, which is applicable to
all Israeli companies. Under the Nasdaq Rules, a majority of our directors is required to
be independent and, under the Israeli Companies Law, we are required to appoint at least
two external directors. According to an amendment to the Companies Law adopted in 2008, a
public company may provide in its articles that independent directors (as defined in the
Companies Law) in such minimal number as shall be determined by the company shall serve in
its board of directors. According to the Companies Law, an independent director is a
director who meets the qualifications required for the appointment of such director as an
external director in the company, other than the requirement for possession of
accounting and financial expertise or professional qualifications,
as shall be approved by audit committee, and who has not served as a director on the board
of directors of the company for more than nine consecutive years. We did not amend our
articles of association to provide for the appointment of independent directors according
to the Companies Law.

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Independent Directors

The
independence standard under the Nasdaq Rules excludes, among others, any person who is a
current or former (at any time during the past three years) employee of a company or its
affiliates as well as the immediate family members of an executive officer (at any time
during the past three years) of a company or its affiliates. Messrs. Joseph Atsmon, Yair
Orgler and Avi Patir currently serve as our independent directors.

External Directors

Under
the Companies Law, companies incorporated under the laws of Israel whose shares have been
offered to the public in or outside of Israel are required to appoint at least two
external directors. A person may not be appointed as an external director if he or she or
his or her relative, partner, employer, any person to whom such person is directly or
indirectly subject to, or any entity under his or her control has, as of the date of the
persons appointment to serve as an external director, or had, during the two years
preceding that date, any affiliation with:

| |  | the
company;
| | - | ------------

| |  | any
entity controlling the company at the date of such person's appointment; or
| | - | -------------------------------------------------------------------------------

| |  | any
entity controlled, at the date of such persons appointment or during the two years
preceding that date, by the company or by its controlling shareholder.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------

The
term affiliation includes:

| |  | an
employment relationship;
| | - | ---------------------------

| |  | a
business or professional relationship maintained on a regular basis;
| | - | ----------------------------------------------------------------------

| |  | control;
and
| | - | ------------

| |  | service
as an office holder.
| | - | ----------------------------

The
Companies Law defines the term office holder of a company to include a
director, the chief executive officer, the chief business manager, a vice general manager,
deputy general manager and any officer that reports directly to the chief executive
officer or any other person fulfilling any of the foregoing positions (even if such
persons title is different).

According
to regulations promulgated under the Companies Law:

| |  | A
public company may appoint an external director to serve as director in its wholly owned
and controlled subsidiaries, subject to certain conditions;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | A
person who served as an external director in a target company which was merged into the
acquiring company shall not be deemed to have an affiliation with the acquiring company;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | A
person who had an affiliation with a corporation (other than the public company or other
corporation under its control) which is under the control of the controlling shareholder
of a public company, only in such period in which such controlling shareholder was not
the controlling shareholder of the public company, shall not be deemed to have an
affiliation during the two years period preceding the date of appointment;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | A
business or professional relationship shall not be deemed as an affiliation if all of the
following conditions are met: (i) the relationship is negligible for both the person who
is the nominee to be appointed as an external director and the company; (ii) the
relationship commenced prior to such persons appointment; (iii) the audit committee
resolved, prior to the appointment, based on facts presented to it, that the condition
detailed in clause (i) is fulfilled; and (iv) the existence of a business or professional
relationship and the approval of the audit committee were brought to the attention of the
shareholders meeting prior to the approval of the appointment.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

An
external director who ceases to possess any qualification required under the Companies Law
for holding the office of an external director must inform the company immediately and
his/her office shall terminate upon such notice.

Yair
Orgler and Avi Patir were appointed in 2006 as our external directors. Their terms began
in March 2007 and will expire in March 2010.

Pursuant
to an amendment to the Companies Law, (1) each external director must have either
accounting and financial expertise or professional qualifications
and (2) at least one of the external directors must have accounting and financial
expertise.

A
director with accounting and financial expertise is a director whose
education, experience and qualifications qualifies him or her to be highly proficient in
understanding business and accounting matters and to thoroughly understand the
companys financial statements and to stimulate discussion regarding the manner in
which financial data is presented. A director with professional qualifications must either
(i) have an academic degree in economics, business management, accounting, law, public
administration or other academic degree or high education in the companys main field
of business or which is relevant to his or her office; or (ii) have at least five
years experience in one or more of the following: senior position in the business
management of a corporation with substantial business activities, senior public servant,
or other seniority in the companys main fields of business.

Our
board of directors has determined that Prof. Orgler has the accounting and financial
expertise required by the Companies Law, and that Mr. Patir has the required
professional qualifications.

No
person can serve as an external director if the persons position or other business
creates, or may create, conflicts of interest with the persons responsibilities as
an external director or may otherwise interfere with the persons ability to serve as
an external director.

A
director in a public company shall not be appointed as an external director in another
public company if at the time of appointment a person who serves as a director of the
other public company also serves as an external director of the first public company.

A
company may not engage an external director as an office holder and may not employ or
receive services from that person for consideration, either directly or indirectly,
including through a corporation controlled by that person, for a period of two years from
the termination of his or her service as an external director.

Election of External
Directors

External
directors are elected by a majority vote at a shareholders meeting, provided that
either:

| |  | at
least one third of the shares of non-controlling shareholders voted at the meeting, not
taking into account any abstentions, vote in favor of the election; or
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
total number of shares voted against the election of the external director does not
exceed one percent of the aggregate voting rights in the company.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------

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The
initial term of an external director is three years with respect to a company such as ours
may be extended for additional three-year terms by the shareholders, if certain conditions
are met. An external director can be removed from office only by the same majority of
shareholders that is required to elect an external director, or by a court (if the
external director ceases to meet the statutory qualifications with respect to his or her
appointment, or if he or she violates his or her duty of loyalty to the company). Each
committee of a companys board of directors which is authorized to exercise the board
of directors authorities is required to include at least one external director,
except for the audit committee, which is required to include all external directors.

In
a company in which, at the date of appointment of an external director, all the directors
are of the same gender, the external director to be appointed shall be of the other
gender.

Audit Committee

Nasdaq Requirements

Under
the Nasdaq Rules, we are required to have an audit committee consisting of at least three
independent directors, all of whom are financially literate and one of whom has been
determined by the board to be the audit committee financial expert. We have adopted an
audit committee charter as required by the Nasdaq Rules. The responsibilities of the audit
committee under the Nasdaq Rules include evaluating the independence of a companys
outside auditors. Currently, Messrs. Joseph Atsmon, Yair Orgler and Avi Patir serve on our
audit committee, each of whom has been determined by the board to be independent. Mr.
Atsmon is the chairman of the audit committee and its financial expert.

The
Nasdaq Rules require that director nominees be selected or recommended for the
boards selection either by a nominations committee composed solely of independent
directors or by a majority of independent directors, subject to certain exceptions.
Similarly, the compensation payable to a companys chief executive officer and other
executive officers must be approved either by a majority of the independent directors on
the board or a compensation committee comprised solely of independent directors, subject
to certain exceptions. In July 2005, our board of directors determined that the
independent directors would carry out these functions.

Companies Law Requirements

Under
the Companies Law, the board of directors of any Israeli company whose shares are publicly
traded must appoint an audit committee, comprised of at least three directors including
all of the external directors, but excluding:

| |  | the
chairman of the board of directors;
| | - | ---------------------------------------

| |  | any
controlling shareholder or any relative of a controlling shareholder; and
| | - | -----------------------------------------------------------------------------

| |  | any
director employed by the company or who provides services to the company on a regular
              basis.
| | - | --------------------------------------------------------------------------------------------------------------

The
role of our audit committee is to identify irregularities in the management of our
business, in consultation with the internal auditor our independent auditors, and to
suggest appropriate courses of action to amend such irregularities. In addition, the
approval of our audit committee is required under the Companies Law to effect certain
related-party transactions.

The
composition of our audit committee satisfies both the Nasdaq Rules and the Companies Law
requirements.

Approval of Certain
Transactions

The
approval of the audit committee is required (and thereafter, the approval of the board of
directors and in certain cases  the approval of the shareholders), under the
Companies Law to effect specified actions and extraordinary transactions with office
holders, third parties (where an office holder has a personal interest in the
transaction), extraordinary transactions with controlling parties, and extraordinary
transactions with a third party (where a controlling party has a personal interest in the
transaction), including a private placement in which the controlling shareholder has a
personal interest, or any transaction with the controlling shareholder or his relative
regarding terms of service and employment. A relative is defined in the
Companies Law as spouse, sibling, parent, grandparent, descendant, spouses
descendant and the spouse of any of the foregoing.

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In
addition, the approval of the audit committee is required (and thereafter, the approval of
the board of directors and of the shareholders, in that order) under the Companies Law, to
effect a private placement of securities, in which either (i) 20% or more of the
companys outstanding share capital prior to the placement are offered, and the
payment for which (in whole or in part) is not in cash, in tradable securities registered
in a stock exchange or not under market terms, and which will result in an increase of the
holdings of a shareholder that holds 5% or more of the companys outstanding share
capital or voting rights or will cause any person to become, as a result of the issuance,
a holder of more than 5% of the companys outstanding share capital or voting rights
or (ii) a person will become a controlling shareholder of the company.

A
controlling party is defined in the Companies Law for purposes of the
provisions governing related party transactions as a person with the ability to direct the
actions of a company, or a person who holds 25% or more of the voting power in a public
company if no other shareholder owns more than 50% of the voting power in the company, but
excluding a person whose power derives solely from his or her position as a director of
the company or any other position with the company, provided that two or more persons
holding voting rights in the company, who each have a personal interest in the approval of
the same transaction, shall be deemed to be one holder.

The
audit committee may not approve an action or an extraordinary transaction discussed above
unless at the time of approval the two external directors are serving as members of the
audit committee and at least one of them is present at the meeting in which an approval
was granted.

Audit
committee approval is also required (and thereafter, the approval of the board of
directors and in certain cases  the approval of the shareholders) to approve the
grant of an exemption from the responsibility for a breach of the duty of care towards the
company, or for the provision of insurance or an undertaking to indemnify any office
holder of the company. In addition, any contract between the company and any of its
directors relating to the service or employment of the director must be approved by the
audit committee, the board of directors and, unless certain conditions specified by
regulations promulgated under the Companies Law are met, the shareholders, in such order.

Remuneration of Directors

Directors
remuneration requires the approval of the audit committee, the board of directors and the
shareholders (in that order). However, according to regulations promulgated under the
Companies Law with respect to the remuneration of external directors, the audit committee
and shareholders approval may be waived if the remuneration to be paid to the
external directors is in the exact amounts set forth in the regulations.

According
to the regulations promulgated under the Companies Law concerning the remuneration of
external directors (the Remuneration Regulations), external directors are
generally entitled to an annual fee, a participation fee for each meeting of the board of
directors or any committee of the board on which he or she serves as a member and
reimbursement of travel expenses for participation in a meeting which is held outside of
the external director place of residence. The minimum, fixed and maximum amounts of
the annual and participation fees are set forth in the Remuneration Regulations, based on
the classification of the company according to the amount of its capital. According to the
Remuneration Regulations, the audit committee and shareholders approval may be
waived if the annual and participation fees to be paid to the external directors are
within the range of the fixed annual fee or the fixed participation fee and the maximum
annual fee or the maximum participation fee for the companys level, respectively.
However, remuneration of an external director in an amount which less than the fixed
annual fee or the fixed participation fee, respectively, requires the approval of the
audit committee, the board of directors and the shareholders (in that order). The
remuneration of external directors must be made known to the candidate for such office
prior to his/her appointment and, subject to certain exceptions, will not be amended
throughout the three-year period during which he or she is in office. A company may
compensate an external director in shares or rights to purchase shares, other than
convertible debentures which may be converted into shares, in addition to the annual
remuneration, the participation award and the reimbursement of expenses, subject to
certain limitations set forth in the External Directors Remuneration Regulations. We pay
our external directors a fixed annual fee, a fixed participation fee and reimbursement of
expenses. In addition we have granted our external directors options to purchase the
Companys shares.

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Additionally,
according to other regulations promulgated under the Companies Law, shareholders
approval for directors compensation and employment arrangements is not required if
both the audit committee and the board of directors resolve that either (i) the
directors compensation and employment arrangements are solely for the benefit of the
company or (ii) the remuneration to be paid to any such director does not exceed the
maximum amounts set forth in the regulations promulgated under the Companies Law regarding
remuneration of external directors; provided however that no holder of 1% or more of the
issued and outstanding share capital or voting rights in the company objects to such
exemption from the shareholders approval requirement such objection to be submitted
to the company in writing not later than fourteen days from the date of the filing of a
report regarding the adoption of such resolution by the company pursuant to the
requirements of the Israeli Securities Law). If such objection is duly and timely
submitted, then the remuneration arrangement of the directors will require
shareholders approval as detailed above.

Neither
we nor any of our subsidiaries has entered into a service contract with any of our current
directors that provide for benefits upon termination of their service as directors.

Option Committee

Our
option committee administers our 1996 Key Employee Share Incentive Plan, our 1997
Affiliate Employee Option Plan and our 2003 Share Option Plan. The members of the option
committee are Messrs. Zisapel and Patir. The board of directors has delegated to the
option committee the authority to grant options under the 1996, 1997 and 2003 option
plans, and to act as the share incentive committee pursuant to those plans, provided that
such grants are within the framework determined by the board.

Dividends

Dividends
may be paid only out of accumulated retained earnings, as defined in the Companies Law, as
of the end of the most recent fiscal period or as accrued over a period of two years,
whichever is higher, and out of surplus derived from net profit and other surplus that is
neither share capital nor premium, all as determined under the Companies Law (the
Profit Test), in each case provided that there is no reasonable concern that
payment of the dividend will prevent us from satisfying our existing and foreseeable
obligations as they become due. Notwithstanding the foregoing, dividends may be paid with
the approval of a court even if the Profit Test is not met, provided that there is no
reasonable concern that payment of the dividend will prevent us from satisfying our
existing and foreseeable obligations as they become due. Dividends may be paid in cash,
assets, shares or debentures. For further information, please see Financial
Information  Dividends.

Internal Auditor

Under
the Companies Law, the board of directors of a public company must appoint an internal
auditor proposed by the audit committee. The role of the internal auditor is to examine,
among other things, whether the companys conduct complies with applicable law,
integrity and orderly business procedure. The internal auditor has the right to request
that the chairman of the audit committee convene an audit committee meeting, and the
internal auditor may participate in all audit committee meetings. Under the Companies Law,
the internal auditor may be an employee of the company but may not be an interested party,
an office holder or a relative of the foregoing, nor may the internal auditor be the
companys independent accountant or its representative. The Companies Law defines the
term interested party to include a person who holds 5% or more of the
companys outstanding share capital or voting rights, a person who has the right to
appoint one or more directors or the general manager, or any person who serves as a
director or as the general manager.

We
have appointed the firm of Chaikin, Cohen, Rubin & Co., Certified Public Accountants
(Isr.) as our internal auditor.

48

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Fiduciary Duties of
Office Holders

The
Companies Law imposes a duty of care and a duty of loyalty on all office holders of a
company, including directors and officers. The duty of care requires an office holder to
act with the level of care with which a reasonable office holder in the same position
would have acted under the same circumstances. The duty of care includes a duty to use
reasonable means to obtain:

| |  | information
regarding the advisability of a given action submitted for his or her approval or
performed by him or her by virtue of his or her position; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | all
other important information pertaining to these actions.
| | - | ------------------------------------------------------------

The
duty of loyalty of an office holder is a duty to act in good faith and for the benefit of
the company, and includes a duty to:

| |  | refrain
from any conflict of interest between the performance of his or her duties in the company
and any other of his or her other duties or his or her personal affairs;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | refrain
from any activity that is competitive with the company;
| | - | ---------------------------------------------------------------

| |  | refrain
from exploiting any business opportunity of the company to receive a personal gain
              for himself or herself or others; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------

| |  | disclose
to the company any information or documents relating to a companys affairs which
the office holder has received due to his or her position as an office holder.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
company may approve an action by an office holder from which the office holder would
otherwise have to refrain due to its violation of the office holders duty of loyalty
(as described above) if:

| |  | the
office holder acts in good faith and the act or its approval does not cause harm to the
company; and
| | - | --------------------------------------------------------------------------------------------------------

| |  | the
office holder discloses the nature of his or her interest in the transaction to the
company in a reasonable time before the companys approval.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------

Each
person listed in the table under Directors and Senior Management above
is considered an office holder under the Companies Law.

Disclosure of Personal
Interests of an Office Holder

The
Companies Law requires that an office holder of a company disclose to the company,
promptly, and, in any event, not later than the first board meeting at which the
transaction is discussed, any direct or indirect personal interest that he or she may have
and all related material information and documents known to him or her relating to any
existing or proposed transaction by the company. If the transaction is an extraordinary
transaction, the office holder must also disclose any personal interest held by:

| |  | the
office holders spouse, siblings, parents, grandparents, descendants, spouses
descendants and the spouses of any of these people; or
| | - | -----------------------------------------------------------------------------------------------------------------------------------------

| |  | any
corporation in which the office holder is a 5% or greater shareholder, director or
general manager or in which he or she has the right to appoint at least one director or
the general manager.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Under
the Companies Law, an extraordinary transaction is a transaction:

| |  | other
than in the ordinary course of business;
| | - | ----------------------------------------------

| |  | otherwise
than on market terms; or
| | - | ----------------------------------

| |  | that
is likely to have a material impact on the companys profitability, assets or
liabilities.
| | - | -----------------------------------------------------------------------------------------------

49

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The
Companies Law does not specify to whom within the company nor the manner in which required
disclosures are to be made. We require our office holders to make such disclosures to our
board of directors.

Under
the Companies Law, once an office holder complies with the above disclosure requirement,
the board of directors may approve a transaction between the company and an office holder,
or a third party where the office holder has a personal interest in the transaction,
unless the articles of association provide otherwise. A transaction that is adverse to the
companys interest may not be approved.

If
the transaction is an extraordinary transaction, first the audit committee and then the
board of directors, in that order, must approve the transaction. Under specific
circumstances, shareholder approval may also be required. A director who has a personal
interest in a transaction, which is considered at a meeting of the board of directors or
the audit committee, generally may not be present at this meeting or vote on this matter,
unless a majority of the board of directors or the audit committee, as the case may be,
has a personal interest. If a majority of the board of directors has a personal interest,
then shareholders approval is also required.

Disclosure of Personal
Interests of a Controlling Shareholder

Under
the Companies Law, the disclosure requirements which apply to an office holder also apply
to a controlling shareholder of a public company. Extraordinary transactions with a
controlling shareholder or in which a controlling shareholder has a personal interest,
including a private placement in which the controlling shareholder has a personal
interest, and the engagement of a controlling shareholder or a relative as an office
holder or employee, require the approval of the audit committee, the board of directors
and the majority of the voting power of the shareholders present and voting at the general
meeting of the company (not including abstentions), provided that either:

| |  | at
least one-third of the shares of shareholders who have no personal interest in the
transaction and who are present and voting (in person or by proxy or written ballot),
vote in favor; or
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | shareholders
who have no personal interest in the transaction who vote against the transaction do not
represent more than one percent of the aggregate voting rights in the company.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

With
respect to the aforementioned transaction, any shareholder participating in the vote must
inform the company prior to the voting whether or not he or she has a personal interest in
the approval of the transaction, and if he or she fails to do so, his or her vote will be
disregarded.

In
accordance with regulations promulgated under the Companies Law, certain extraordinary
transactions between a public company and its controlling shareholder(s) do not require
shareholders approval, subject to the existence of one of the following
circumstances, which existence was approved by the audit committee and then by the board
of directors, such circumstances exist when a contemplated transaction: (i) may involve
the extension of an existing transaction that was duly approved in accordance with the
provisions of the Companies Law and does not involve any significant change in the terms
of the existing transaction and other related circumstances or the change is solely for
the benefit of the company; (ii) is solely for the benefit of the company; (iii) is with
the controlling shareholder or another person in which the controlling shareholder has an
interest and the transaction is in accordance with the terms of a framework transaction
that was duly approved under the provisions of the Companies Law, such framework
transaction allowing the company to execute transactions, in the ordinary course of
business, of similar type, period and such other terms detailed in the framework
transaction; (iv) is with the controlling shareholder or another person in which the
controlling shareholder has an interest, the purpose of which is a transaction with a
third party or a joint proposal to enter into a transaction with a third party, and the
terms of the transaction that apply to the company are not materially different from the
terms that apply to the controlling shareholder or an entity controlled by him or her
(while taking into account the extent of their respective involvement in the transaction);
or (v) is among companies under the common control of a controlling shareholder, or
between a public company and the controlling shareholder or another person in which the
controlling shareholder has a personal interest, and the transaction is on market terms,
within the ordinary course of business and does not harm the company. Additionally,
employment and compensation arrangements for an office holder that is a controlling
shareholder in a public company and the purchase of an insurance policy for such
controlling shareholder or his relative do not require shareholders approval if
certain criteria are met, as approved by the audit committee and the board of directors.
The foregoing exemptions from shareholders approval will not apply if one or more
shareholders holding at least 1% of the issued and outstanding share capital of a public
company or of such companys voting rights, objects to the use of these exemptions
provided that such objection is submitted to the company in writing not later than
fourteen days from the date of the filing of a report regarding the adoption of such
resolution by the company pursuant to the requirements of the Israeli Securities Law. If
such objection is duly and timely submitted, then the transaction or compensation
arrangement of the directors will require shareholders approval as detailed above.

50

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In
addition, under the Companies Law, each shareholder has a duty to act in good faith in
exercising his rights and fulfilling his obligations toward the company and other
shareholders and to refrain from abusing his power in the company, such as shareholder
votes. Further, specified shareholders have a duty of fairness toward the company. These
shareholders include any controlling shareholder, any shareholder who knows that he or she
possesses the power to determine the outcome of a shareholders vote, and any
shareholder who, pursuant to the provisions of the Articles of Association, has the power
to appoint or to prevent the appointment of an office holder or any other power toward the
company. However, the Companies Law does not define the substance of this duty of
fairness.

Exculpation, Insurance
and Indemnification of Directors and Officers

Under
the Companies Law, an Israeli company may not exempt an office holder from liability for a
breach of his or her duty of loyalty, but may exempt in advance an office holder from his
or her liability to the company, in whole or in part, for a breach of his or her duty of
care (except in connection with distributions), provided that the Articles of Association
allow it to do so. Our Articles of Association allow us to exempt our office holders to
the fullest extent permitted by law.

Office Holders
Insurance

Our
Articles of Association provide that, subject to the provisions of the Companies Law, we
may enter into a contract for the insurance of the liability of any of our office holders
concerning an act performed by him or her in his or her capacity as an office holder for:

| |  | a
breach of his or her duty of care to us or to another person;
| | - | ---------------------------------------------------------------

| |  | a
breach of his or her duty of loyalty to us, provided that the office holder acted in good
faith and had reasonable cause to assume that his or her act would not prejudice our
interests; or
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | a
financial liability imposed upon him or her in favor of another person.
| | - | -------------------------------------------------------------------------

Exculpation and
Indemnification of Office Holders

Our
Articles of Association provide that, subject to the provisions of the Companies Law, we
may indemnify any of our office holders against an act performed in his or her capacity as
an office holder, including indemnity for the following:

| |  | a
financial liability imposed on him or her in favor of another person by any judgment,
including a settlement or an arbitration award approved by a court. Such indemnification
may be approved (i) after the liability has been incurred or (ii) in advance, provided
that our undertaking to indemnify is limited to events that our board of directors
believes are foreseeable in light of our actual operations at the time of providing the
undertaking and to a sum or criterion that our board of directors determines to be
reasonable under the circumstances, provided, that such event, sum or criterion shall be
detailed in the undertaking;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

51

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| |  | reasonable
litigation expenses, including attorneys fees, expended by the office holder as a
result of an investigation or proceeding instituted against him by a competent authority,
provided that such investigation or proceeding concluded without the filing of an
indictment against him and either (i) concluded without the imposition of any financial
liability in lieu of criminal proceedings or (ii) concluded with the imposition of a
financial liability in lieu of criminal proceedings but relates to a criminal offense
that does not require proof of criminal intent; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | reasonable
litigation expenses, including attorneys fees, expended by the office holder or
charged to him or her by a court, resulting from the following: proceedings we institute
against him or her or instituted on our behalf or by another person; a criminal
indictment from which he or she was acquitted; or a criminal indictment in which he or
she was convicted for a criminal offense that does not require proof of intent.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Limitations on Insurance
and Indemnification

The
Companies Law provides that a company may not exculpate or indemnify an office holder nor
enter into an insurance contract which would provide coverage for any monetary liability
incurred as a result of any of the following:

| |  | a
breach by the office holder of his or her duty of loyalty, except that the company may
enter into an insurance contract or indemnify an office holder if the office holder acted
in good faith and had a reasonable basis to believe that the act would not prejudice the
company;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | a
breach by the office holder of his or her duty of care if the breach was done
intentionally or recklessly, unless it was committed only negligently;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | any
act or omission done with the intent to derive an illegal personal benefit; or
| | - | ----------------------------------------------------------------------------------

| |  | any
fine levied against the office holder.
| | - | ------------------------------------------

In
addition, under the Companies Law, exculpation and indemnification of, and procurement of
insurance coverage for, our office holders must be approved by our audit committee and our
board of directors and, with respect to an office holder who is also a controlling
shareholder or a director, also by our shareholders (unless the exemptions discussed above
apply).

We
indemnify our office holders to the fullest extent permitted under the Companies Law. We
currently hold directors and officers liability insurance for the benefit of our office
holders. This policy was approved by our board of directors and by our shareholders.
Insofar as indemnification for liabilities arising under the United States Securities Act
of 1933, as amended, may be permitted to our directors, officers and controlling persons,
we have been advised that, in the opinion of the SEC, such indemnification is against
public policy as expressed in the Securities Act and is, therefore, unenforceable.

Mergers and Acquisitions
under Israeli Law

The
Companies Law includes provisions that allow a merger transaction and requires that each
company that is a party to the merger have the transaction approved by its board of
directors and a vote of the majority of its shares. However, with respect to companies
such as Ceragon, which were incorporated prior to the Companies Law coming into effect,
shareholders approval must be obtained by holders of at least 75% of the shares
participating at the shareholders meeting and voting thereon, not taking into
account any abstentions. In accordance to the Companies Law, a shareholders meeting
may resolve that a lower majority will be required for the approval of a merger, provided
that such resolution is approved by holders of at least 75% of the shares participating at
the shareholders meeting and voting thereon, not taking into account any
abstentions.

52

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The
board of directors of any merging company contemplating whether to approve a merger must
determine, in light of the financial condition of the merging companies, whether in its
opinion exists a reasonable concern that, as a result of the merger, the surviving company
will be unable to satisfy the obligations of any of the parties to the merger. If such
reasonable concern exists, the board of directors will not authorize the merger.

For
purposes of the shareholders vote of each party, the merger will not be deemed approved if
shares, representing a majority of the voting power present at the shareholders
meeting and which are not held by the other party to the merger (or by any person who
holds 25% or more of the voting power or the right to appoint 25% or more of the directors
of the other party), vote against the merger (the dissenting shares). If a
person holds at least 25% of the voting shares or 25% of the rights to appoint directors
in both merging companies, the aforementioned limitation shall apply with respect to both
merging companies. If the transaction would have been approved but for the objection of
the dissenting shares, a court may still approve the merger upon the request of holders of
at least 25% of the voting rights of a company, if the court holds that the merger is fair
and reasonable, taking into account the valuation of each of the parties to the merger and
the consideration offered to the shareholders.

Upon
the request of a creditor of either party to the proposed merger, the court may delay or
prevent the merger if it concludes that there exists a reasonable concern that as a result
of the merger the surviving company will be unable to satisfy the obligations of any of
the parties to the merger. In addition, a merger may not be completed unless at least (i)
50 days have passed from the time that the requisite proposals for approval of the merger
were filed with the Israeli Registrar of Companies by each merging company and (ii) 30
days have passed since the merger was approved by the shareholders of each merging
company.

A
merger is not subject to shareholders approval (i) of the target company  if
such target company is a wholly-owned subsidiary of the acquiring company; (ii) of the
acquiring company  if (a) the merger does not involve an amendment to the acquiring
companys articles of association or memorandum of association, and (b) the acquiring
company does not issue within the framework of the merger more than 20% of voting rights
(for that matter only  any securities held by such person which may be converted or
exercised into shares shall be deemed to be converted or exercised, as applicable), and no
person will become, as a result of any issuance of securities in the acquiring company
within the framework of the merger, a controlling shareholder, and (c) if no circumstances
which enable the dissenting shareholders to deny approval of the merger (as detailed
above) exist.

If
the target company shares are divided into more than one class of shares, the merger is
also conditioned upon approval by the shareholders participating in all such class
meetings. Notwithstanding the lack of such approval by all such class meetings, a court
may still approve the merger upon the request of holders of at least 25% of the voting
rights of a company, if the court holds that the merger is fair and reasonable, taking
into account the valuation of each of the parties to the merger and the consideration
offered to the shareholders.

Special
Tender Offer. The Companies Law also provides that an acquisition of shares
in a public company must be made by means of a tender offer if as a result of the
acquisition the purchaser would become a holder of 25% or more of the voting power in the
company. This rule does not apply if there is already another holder of 25% or more of the
voting power in the company. Similarly, the Companies Law provides that an acquisition of
shares in a public company must be made by means of a tender offer if as a result of the
acquisition the purchaser would become a holder of 45% or more of the voting power in the
company, unless there is already a holder of 45% or more of the voting power in the
company. These requirements do not apply if, in general, the acquisition (1) was made in a
private placement that received shareholders approval (including approval of the
purchaser becoming a holder of 25% or more, or 45% or more, of the voting power in the
company, unless there is already a holder of 25% or more or 45% or more, respectively, of
the voting power in the company), (2) was from a holder of 25% or more of the voting power
in the company which resulted in the acquirer becoming a holder of 25% or more of the
voting power in the company, or (3) was from a holder of 45% or more of the voting power
in the company which resulted in the acquirer becoming a holder of 45% or more of the
voting power in the company. The tender offer must be extended to all shareholders, but
the offeror is not required to purchase more than 5% of the companys outstanding
shares, regardless of how many shares are tendered by shareholders. The tender offer may
be consummated only if (i) at least 5% of the companys outstanding shares will be
acquired by the offeror and (ii) the number of shares tendered in the offer exceeds the
number of shares whose holders objected to the offer.

53

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Full
Tender Offer. The Companies Law also provides that if, as a result of an
acquisition of shares, the acquirer will hold more than 90% of a companys
outstanding shares, the acquisition must be made by means of a tender offer for all of the
outstanding shares. If less than 5% of the outstanding shares are not tendered in the
tender offer, all the shares that the acquirer offered to purchase will be transferred to
the acquirer. The Companies Law provides for appraisal rights if any shareholder who was
an offeree in the tender offer files a request in court within three months following the
consummation of a full tender offer. If more than 5% of the outstanding shares are not
tendered in the tender offer, then the acquirer may not acquire shares in the tender offer
that will cause his shareholding to exceed 90% of the outstanding shares. Shares acquired
in violation of these provisions become dormant and cease to confer any rights upon their
holder as long as the shares are held by the acquirer.

Regular
Tender Offer. According to regulations promulgated under the Israeli
Securities Law, an action of an offeror which is intended to persuade the public to sell
to the offeror securities, including securities which may be converted or exercised into
shares of a public company, constituting more than 5% of such registered securities,
within any 6 month period, but excluding the acquisition of such securities on a stock
exchange, must be made by a way of a tender offer directed to all such securities holders
on equal terms.

Any
tender offer must be made by a written document and meet specific requirements set forth
in the regulations promulgated under the Israeli Securities Law. However, such regulations
set forth that, with respect to a tender offer which is subject to, in addition the
Israeli regulations, the law of a foreign state, including the rules and guidelines
applicable to an exchange on which such companys shares are registered for trade,
the tender offer may be exempt from any provision of the regulations if the chairman of
the Israeli Securities Authority concludes that such provision may be detriment to the
tender offer and the waiver of such provision will not be detriment to a reasonable
offeree.

Israel
tax law treats share-for-share acquisitions between an Israeli company and another company
less favorably than does U.S. tax law. For example, Israeli tax law may, under certain
circumstances, subject a shareholder who exchanges his or her ordinary shares for shares
in another corporation to taxation prior to the sale of the shares received for such
share-for-share swap.

# Employees

As
of December 31, 2008, we had 444 employees  worldwide, of whom 127 were employed in
research, development and engineering, 245 in sales and marketing, 35 in management and
administration and 37 in operations. Of these employees, 265 were based in Israel, 24 were
based in the United States, 19 were based in Europe, 20 were based in Latin America and
116 were based in Asia-Pacific.

As
of December 31, 2007, we had 334 employees worldwide, of whom 118 were employed in
research, development and engineering, 142 in sales and marketing, 33 in management and
administration and 41 in operations. Of these employees, 251 were based in Israel, 19 were
based in the United States, 13 were based in Europe, 15 were based in Latin America and 36
were based in Asia-Pacific.

As
of December 31, 2006, we had 304 employees worldwide, of whom 108 were employed in
research, development and engineering, 132 in sales and marketing, 28 in management and
administration and 36 in operations. Of these employees, 220 were based in Israel, 20 were
based in the United States, 14 were based in Europe, 16 were based in Latin America and 34
were based in Asia-Pacific.

We
and our employees are not parties to any collective bargaining agreements. However, with
respect to our Israeli employees, we are subject to Israeli labor laws, regulations and
collective bargaining agreements between the Histadrut, the General Federation of Labor in
Israel, and the Coordination Bureau of Economic Organizations, including the
Industrialists Association, by extension orders of the Israeli Ministry of Labor and
Welfare, as are in effect from time to time with respect to our Israeli employees. These
laws and regulations principally concern matters such as paid annual vacation, paid sick
days, length of the workday and work week, minimum wages, payment for overtime, payment
during reserve duty, insurance for work-related accidents, severance payments and other
conditions of employment. Generally, we provide our employees with benefits and working
conditions above the legally required minimums.

Israeli
law generally requires severance pay upon the retirement or death of an employee or
termination without due cause. We currently fund a partial amount of the severance
obligations by making monthly payments in the amount of 8.33% of an employees
monthly wages to approved pension funds or insurance policies.

54

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Furthermore,
we and our employees are required to make payments to the National Insurance Institute,
which is similar to the U.S. Social Security Administration. Such amounts also include
payments by the employee for mandatory health insurance. The total payments to the
National Insurance Institute are equal to approximately 17.43% of an employees
salary (up to a maximum amount), of which the employee contributes approximately 12.00%
and the employer contributes approximately 5.43% of the salary.

Substantially
all of our employment agreements include employees undertakings with respect to
non-competition, assignment to us of intellectual property rights developed in the course
of employment and confidentiality. However, it should be noted that the enforceability of
non- competition undertakings is rather limited under Israeli law.

Our
employees are covered by a managers insurance, which provides life and pension
insurance coverage with customary benefits to employees, including retirement and
severance benefits. We contribute 13.33% of the employees base salary (which
includes a severance amount) to managers insurance fund and the employees
contribute 5.00% of their base salary to such funds. In addition, our employees are
entitled to an advanced education fund. We contribute 7.50% of the
employees base salary and the employees contribute 2.50% of their base salary to
such fund.

Our
employees are not represented by a labor union. To date, we have not experienced
labor-related work stoppages and believe that our relations with our employees are good.

The
employees of our subsidiaries are subject to local labor laws and regulations that vary
from country to country.

# Share Ownership

The
following table sets forth certain information regarding the ordinary shares owned, and
stock options held, by our directors and senior management as of March 15, 2009. The
percentage of outstanding ordinary shares is based on ordinary shares outstanding as of
March 15, 2009.

|Name                        | Number of Ordinary
Shares | Percentage ofOutstandingOrdinary Shares | Number of Stock
Options Held (1) | Range of exercise
prices per share
of stock options
|--------------------------- | ------------------------- | --------------------------------------- | -------------------------------- | ---------------------------------------------------
|
|
|
|
|Zohar Zisapel               |                           |                                         |                                  | 4,101,559                                          
|Ira Palti                   |                           |                                         |                                  | -                                                  
|All directors and senior    |                           |                                        
|management as a group,      |                           |                                        
|consisting of 14 people (2) |                           |                                         |                                  | 4,101,559                                          

|(1) | Each
stock option is exercisable into one ordinary share, and expires 10 years from the date
of       its grant.
|--- | ----------------------------------------------------------------------------------------------------------------

|(2) | Each
of the directors and senior managers other than Messrs. Zohar Zisapel and Ira Palti
      beneficially owns less than 1% of the outstanding ordinary shares as of March 15,
2009 (including       options held by each such person and which are vested or shall
become vested within 60 days of       March 15, 2009) and have therefore not been
separately disclosed.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Stock Option Plans

1996 Key Employee Share Incentive Plan

In
August 1996, we adopted our key employee share incentive plan. We ceased granting options
under this plan as of December 31, 2002 in light of the adoption of our 2003 share option
plan and a change in applicable Israeli tax laws, although options granted under this
plan before December 31, 2002 are still valid subject to the plan. Employees of our
company and our subsidiaries or affiliates belonging to the RAD-BYNET group were eligible
to participate in the plan. The options expire five to ten years from the date of grant.
The following table presents option grant information for this plan as of December 31,
2008:

|Ordinary shares reserved
for option grants | Options outstanding | Weighted average
exercise price
|------------------------------------------ | ------------------- | -------------------------------
|
|
|
|
|387,200                                    | 387,200             | $6.54                          

Affiliate Employees Option Plan

In
May 1997, we adopted our affiliate employees option plan. We ceased granting options
under this plan as of February 2003 in light of the adoption of our 2003 share option
plan and a change in applicable Israeli tax laws, although options granted under this
plan before February 2003 are still valid subject to the plan. This plan has terms that
are substantially identical to the terms of the 1996 key employee share incentive plan.
The options expire five to ten years from the date of grant. The following table presents
option grant information for this plan as of December 31, 2008:

|Ordinary shares reservedfor option grants | Options outstanding | Weighted averageexercise price
|----------------------------------------- | ------------------- | ------------------------------
|
|
|
|
|339,208                                   | 339,208             | $4.21                         

In
September 2003, our shareholders approved the transfer of all unissued shares previously
reserved by our shareholders for option grants for which no options were granted under
the 1996 key employee share incentive plan and the affiliate employees plan for grants
pursuant to the 2003 share option plan.

The 2003 Share Option Plan

In
September 2003, our shareholders approved and adopted our 2003 share option plan. This
plan complies with changes in Israeli tax law that were introduced in 2003 with respect
to share options. The plan is designed to grant options pursuant to Section 102 or 3(i)
of the Israeli Tax Ordinance (New Version), 1961. It is also intended to be a "qualified
plan" as defined by U.S. tax law. Our worldwide employees, directors, consultants and
contractors are eligible to participate in this plan. The option committee of our board
of directors administers the plan. Generally, the options expire ten years from the date
of grant. The option committee has an authority to include in the notice of grant a
provision regarding the acceleration of the vesting period of any option granted upon the
occurrence of certain events. In addition, our board of directors has sole discretion to
determine, in the event of a transaction with other corporation, as defined in the plan,
that each option shall either: (i) be substituted for an option to purchase securities of
the other corporation; (ii) be assumed by the other corporation; or (iii) automatically
vest in full. In the event that all or substantially all of the issued and outstanding
share capital of the company shall be sold, each option holder shall be obligated to
participate in the sale and to sell his/her options at the price equal to that of any
other share sold. This plan has been approved by the Israeli Tax Authority as is required
by applicable law. The following table presents option grant information for this plan as
of December 31, 2008.

|Cumulative Ordinary Shares
Reserved for Option Grants | Remaining Reserved
Shares Available for
Option Grants | Options Outstanding | Weighted Average Exercise Price
|----------------------------------------------------- | ----------------------------------------------------- | ------------------- | -------------------------------
|
|
|
|
|13,546,780                                            | 338,482                                               | 4,666,093           | $    5.39                      

56

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---

The
following  table presents  certain option grant  information  concerning the
 distribution of options  (granted  under all three plans of the Company)  among
 directors and employees of the Company as of December 31, 2008:

|                                | Options Outstanding | Unvested Options
|------------------------------- | ------------------- | ----------------
|
|
|
|
|Directors and senior management |                     |                 
|                                |                     |                 
|All other grantees              |                     |                 

During
2008, our board of directors approved a stock option exchange program for certain share
options that were granted during 2007 and 2008 until the date of the exchange program
(the Options). Under the exchange program, we offered our employees the
opportunity to exchange the Options for new options to be granted to them on the date of
the exchange. These new options would have a new exercise price which would be equal to
the closing price of our Ordinary shares on the NASDAQ Global Market on the date the new
options were granted. As a result of the exchange, on November 6, 2008 391,000 options
with an exercise price ranging between $7 to 17 per share were cancelled and 391,000
options with an exercise price of $5.65 per share were granted. According to the program,
those new options will vest over a period of four years commencing on the date of the
exchange.

Amendment

Subject
to applicable law, our board of directors may amend the plan, provided that any action by
our board of directors which will alter or impair the rights or obligations of an option
holder requires the prior consent of that option holder.

|ITEM 7. |  | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
|------- |  | -------------------------------------------------

# Major Shareholders

The
following table sets forth stock ownership information as of March 15, 2009 (unless
otherwise noted below) with respect to each person who is known by us to be the beneficial
owner of more than 5% of our outstanding ordinary shares, based on information provided to
us by the holders or disclosed in public filings with the SEC.

Except
where otherwise indicated, and except pursuant to community property laws, we believe,
based on information furnished by such owners, that the beneficial owners of the ordinary
shares listed below have sole investment and voting power with respect to such shares. The
shareholders listed below do not have any different voting rights from any of our other
shareholders. We know of no arrangements which would, at a subsequent date, result in a
change of control of our company.

Total
shares beneficially owned in the table below include shares that may be acquired upon the
exercise of options that are exercisable within 60 days. The shares that may be issued
under these options are treated as outstanding only for purposes of determining the
percent owned by the person or group holding the options but not for the purpose of
determining the percentage ownership of any other person or group. Each of our directors
and officers who is also a director or officer of an entity listed in the table below
disclaims ownership of our ordinary shares owned by such entity.

57

---

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|Name                              | Number of OrdinaryShares | Percentage ofOutstandingOrdinary Shares(1)
|--------------------------------- | ------------------------ | ------------------------------------------
|
|
|
|
|Zohar Zisapel (2)(3)              |                          |                                           
|Yehuda Zisapel (2)                |                          |                                           
|William Leland Edwards et al. (4) |                          |                                           

|(1) | Based
on ordinary shares issued and outstanding as of March 15, 2009.
|--- | ---------------------------------------------------------------------

|(2) | Yehuda
Zisapel and Zohar Zisapel are brothers. Each shareholders address                is
24 Raoul Wallenberg St., Tel Aviv 69719, Israel.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------

|(3) | During
2008, Zohar Zisapel increased his beneficial ownership of our ordinary
               shares by 1,011,872 shares, as reflected in a Statement on Schedule 13D
filed                with the SEC on November 24, 2008 by Mr. Zisapel.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Based
on information provided in a Statement on Schedule 13G filed with the SEC
               on February 17, 2009 by William Leland Edwards, Anthony Joonkyoo Yun, MD,
Palo                Alto Investors, Palo Alto Investors LLC (PAI). Palo Alto
Investors                is the manager of PAI. William Leland Edwards is the controlling
shareholder of                Palo Alto Investors and has sole voting and dispositive
power over 28,200 of the                ordinary shares, and shared voting and
dispositive power over 1,830,600 of the                ordinary shares. Anthony Joonkyoo
Yun, MD, is the President of Palo Alto                Investors and PAI. Dr. Yun, Palo
Alto Investors and PAI have shared voting and                dispositive power over
1,830,600 of the ordinary shares. The principal business                office of the
shareholder is 470 University Avenue, Palo Alto, California,                94301.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As of March 15, 2009, approximately
87% of our ordinary shares were held in the United States and there were 33 record holders
with addresses in the United States. These numbers are not representative of the number of
beneficial holders of our shares nor are they representative of where such beneficial
holders reside since many of these ordinary shares were held of record by brokers or other
nominees (including one U.S. nominee company, CEDE & Co., which held approximately 94%
of our outstanding ordinary shares as of said date).

# Related Party
Transactions

The RAD-BYNET Group of
Companies

Yehuda
Zisapel is a principal shareholder who, as of March 15, 2009, beneficially owns 6.6% of
our ordinary shares. Zohar Zisapel, the Chairman of our board of directors and a principal
shareholder of our company, beneficially owns 12.8% of our ordinary shares as of March 15,
2009. They are brothers who do not vote as a group and do not have a voting agreement.
Individually or together, they are also founders, directors or principal shareholders of
several other companies which, together with us and the other affiliates, are known as the
RAD-BYNET group. These corporations include the following, as well as several other real
estate, holding, biotech and pharmaceutical companies:

|                                |                                                   |               
|------------------------------- | ------------------------------------------------- | --------------
|
|
|
|
|AB-NET Communications Ltd.      | Internet Binat Ltd.                               | RADLive Ltd.  
|BYNET Data Communications Ltd.  | Packetlight Networks Ltd.                         | RADVision Ltd.
|BYNET Electronics Ltd.          | RAD-Bynet Properties and Services (1981) Ltd.     | RADWARE Ltd.  
|BYNET SEMECH (Outsourcing) Ltd. |                                                   | RADWIN Ltd.   
|BYNET Software Systems Ltd.     | RADCOM Ltd.                                       | SANRAD Inc.   
|BYNET Systems Applications Ltd. | RAD Data Communications Ltd. and its subsidiaries | SILICOM Ltd.  
|Chanellot Ltd.                  |                                                   | WISAIR Inc.   
|Commex Technologies Ltd.        |                                                   |               

The
above list does not constitute a complete list of the investments of Messrs. Yehuda and
Zohar Zisapel.

Mr.
          Atsmon, one of our directors, also serves as a director of RADVision Ltd.,
          another company in the RAD-BYNET group. Ms Langer, one of our directors, acts
as           general counsel for several companies in the RAD- BYNET group.

58

---

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In
addition to engaging in other businesses, members of the RAD-BYNET group are actively
engaged in designing, manufacturing, marketing and supporting data communications
products, none of which currently compete with our products. Some of the products of
members of the RAD-BYNET group are complementary to, and may be used in connection with,
our products.

Members
of the RAD-BYNET group provide us on an as-needed basis with management information
systems, marketing, and administrative services, and we reimburse each company for its
costs in providing these services. Members of the RAD-BYNET provide us and other RAD-BYNET
companies with logistics services such as transportation and cafeteria facilities. We
lease our offices from other members of the RAD-BYNET group. The aggregate amount of these
expenses was approximately $2.6 million in 2008.

We
generally ascertain the market prices for goods and services that can be obtained at
arms length from unaffiliated third parties before entering into any transaction
with a member of the RAD-BYNET group for those goods and services. In addition, all of our
transactions to date with members of the RAD-BYNET group were approved by our board of
directors and audit committee. As a result, we believe that the terms of the transactions
in which we have engaged and are currently engaged with other members of the RAD-BYNET
group are beneficial to us and no less favorable to us than terms which might be available
to us from unaffiliated third parties. Any future transaction and arrangement with
entities, including other members of the RAD-BYNET group, in which our office holders have
a personal interest will require approval by our audit committee, our board of directors
and, if applicable, our shareholders.

Lease Arrangements

We
lease most of our office space for our current headquarters and principal administrative,
finance, marketing and sales operations from real estate holding companies controlled by
Yehuda and Zohar Zisapel. The leased facility is approximately 51,100 square feet in size.
The leases for the majority of this facility are valid until December 2010, with an option
to renew for an additional two-year period. Additionally, we lease space for our U.S.
headquarters from a real estate holding company controlled by Yehuda Zisapel and Zohar
Zisapel. This facility is approximately 5,800 square feet in size. The lease for this
facility is valid until July 2013. The aggregate amount of rent and maintenance expenses
related to these properties was approximately $1.4 million in 2008.

Supply Arrangement

We
purchase components and products from RAD Data Communications Ltd., RADWIN Ltd. and other
members of the RAD-BYNET group which we integrate into our products or product offerings.
The aggregate purchase price of these components was approximately $4.3 million for the
year ended December 31, 2008.

Registration Rights

In
connection with the private placement of preferred shares before our initial public
offering in August 2000, several of our shareholders were granted registration rights with
respect to ordinary shares which resulted following conversion of their preferred shares
immediately prior to the completion of our initial public offering. The agreement grants
registration rights to each of:

| |  | the
majority of the holders of the ordinary shares resulting from the conversion of such
              preferred shares; and
| | - | ----------------------------------------------------------------------------------------------------------------------------

| |  | Yehuda
Zisapel and Zohar Zisapel.
| | - | ---------------------------------

Under
the agreement, each of these shareholders has the right to have its ordinary shares
included in certain of our registration statements.

|ITEM 8: |  | FINANCIAL INFORMATION
|------- |  | ---------------------

# Consolidated Statements
and Other Financial Information

The
annual financial statements required by this item are found at the end of this Annual
Report, beginning on Page F-1.

59

---

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# Export Sales

In
2008, 99% of our sales were to customers located outside of Israel.

# Legal Proceedings

We are
not a party to any material legal proceedings, nor have there been any material legal
proceedings in which any of our directors, members of senior management, or affiliates is
either a party adverse to us or has a material interest adverse to us. There are no
material legal or governmental proceedings which we know to be pending against us.

# Dividends

We
have never declared or paid any dividend on our ordinary shares and we do not anticipate
paying any dividends on our ordinary shares in the future, except for the share dividend
that was paid as a result of a 250-for-1 share recapitalization that took place
immediately prior to our initial public offering. We currently intend to retain all future
earnings to finance our operations and to expand our business.

# No Significant Changes

No
significant changes to Ceragons financial condition have occurred since the date of
the annual financial statements included herein.

|ITEM 9: |  | THE OFFER AND LISTING
|------- |  | ---------------------

# Offer and Listing Details

Our
ordinary shares have been listed on the Nasdaq Global Market, or Nasdaq, since August 4,
2000 and on the Tel Aviv Stock Exchange, or TASE, since September 12, 2004, both under the
symbol CRNT.

The
table below sets forth for the periods indicated the high and low market prices of our
ordinary shares as reported on Nasdaq.

|                                       | Ordinary Shares
|-------------------------------------- | ---------------
|
|
|
|
|2004 (Annual)                          |                
|                                       |                
|2005 (Annual)                          |                
|                                       |                
|2006 (Annual)                          |                
|                                       |                
|2007 (Annual)                          |                
|                                       |                
|2008 (Annual)                          |                
|                                       |                
|2007                                   |                
|First Quarter                          |                
|Second Quarter                         |                
|Third Quarter                          |                
|Fourth Quarter                         |                
|                                       |                
|2008                                   |                
|First Quarter                          |                
|Second Quarter                         |                
|Third Quarter                          |                
|Fourth Quarter                         |                
|                                       |                
|2009                                   |                
|First Quarter (through March 13, 2009) |                

60

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The table below sets forth the high
and low market prices for our shares on Nasdaq during the most recent six-month period:

|                                    | High | Low
|----------------------------------- | ---- | ---
|
|
|
|
|September 2008                      |      |    
|October 2008                        |      |    
|November 2008                       |      |    
|December 2008                       |      |    
|January 2009                        |      |    
|February 2009                       |      |    
|March 2009 (through March 13, 2009) |      |    

The
table below sets forth for the periods indicated the high and low market prices of our
ordinary shares on the TASE. The translation from NIS into U.S. dollars for the following
two tables is based on representative rates of exchange published by the Bank of Israel.

|                                       | High | Low
|-------------------------------------- | ---- | ---
|
|
|
|
|2005 (Annual)                          |      |    
|                                       |      |    
|2006 (Annual)                          |      |    
|                                       |      |    
|2007 (Annual)                          |      |    
|                                       |      |    
|2008 (Annual)                          |      |    
|                                       |      |    
|2007                                   |      |    
|First Quarter                          |      |    
|Second Quarter                         |      |    
|Third Quarter                          |      |    
|Fourth Quarter                         |      |    
|                                       |      |    
|2008                                   |      |    
|First Quarter                          |      |    
|Second Quarter                         |      |    
|Third Quarter                          |      |    
|Fourth Quarter                         |      |    
|                                       |      |    
|2009                                   |      |    
|First Quarter (through March 13, 2009) |      |    

61

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The
table below sets forth the high and low market prices for our shares on the TASE during
the most recent six-month period:

|                                    | High | Low
|----------------------------------- | ---- | ---
|
|
|
|
|September 2008                      |      |    
|October 2008                        |      |    
|November 2008                       |      |    
|December 2008                       |      |    
|January 2009                        |      |    
|February 2009                       |      |    
|March 2009 (through March 13, 2009) |      |    

# Markets

See Offer and
Listing Details above.

|ITEM 10. |  | ADDITIONAL INFORMATION
|-------- |  | ----------------------

# Memorandum and Articles
of Association

A
description of our memorandum and articles of association was previously provided in our
registration statement on Form F-1 (Registration Statement 333-12312) filed with the SEC
on August 3, 2000, and is incorporated herein by reference. The memorandum of association
and articles of association as amended in October 2007 were previously provided in our
annual report on Form 20-F for the year 2007 and are incorporated herein by reference.

# Material Contracts

None.

# Exchange Controls

There
are currently no Israeli currency control restrictions on payments of dividends or other
distributions with respect to our ordinary shares or the proceeds from the sale of the
shares, except for the obligation of Israeli residents to file reports with the Bank of
Israel regarding certain transactions. However, legislation remains in effect pursuant to
which currency controls can be imposed by administrative action at any time.

The
ownership or voting of our ordinary shares by non-residents of Israel, except with respect
to citizens of countries which are in a state of war with Israel, is not restricted in any
way by our memorandum of association or articles of association or by the laws of the
State of Israel.

# Taxation

The
following is a short summary of the tax environment to which shareholders may be subject.
The following is not intended, and should not be construed, as legal or professional tax
advice and is not exhaustive of all possible tax considerations. Each individual should
consult his or her own tax or legal advisor.

This
summary is based on the current provisions of tax law and, except for the foregoing, does
not anticipate any possible changes in law, whether by legislative, regulatory,
administrative or judicial action. Holders of our ordinary shares should consult their own
tax advisors as to the United States, Israeli or other tax consequences of the purchase,
ownership and disposition of ordinary shares.

62

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General Corporate Tax
Structure in Israel

Israeli
companies are generally subject to corporate tax on their taxable income at the rate of
27% for the 2008 tax year. Following an amendment to the Israeli Income Tax Ordinance [New
Version], 1961 (the Israeli Tax Ordinance), which came into effect on January
1, 2006, the corporate tax rate is scheduled to decrease to 26% for the 2009 tax year and
25% for the 2010 tax year and thereafter. Israeli companies are generally subject to
capital gains tax at a rate of 25% for capital gains (other than gains deriving from the
sale of listed securities) derived after January 1, 2003.

However,
the effective tax rate payable by a company that derives income from an approved
enterprise, discussed further below, may be considerably lower. See The Law for the
Encouragement of Capital Investments, 1959 below.

The Law for the
Encouragement of Capital Investments, 1959

Tax Benefits before the
2005 amendment

The
Law for the Encouragement of Capital Investments, 1959, commonly referred to as the
Investments Law, provides that a proposed capital investment in eligible facilities may be
designated as an approved enterprise. See Tax Benefits under the 2005
Amendment below regarding an amendment to the Investments Law that came into effect
in 2005.

Each
certificate of approval for an approved enterprise, received upon application to the
Investment Center of the Ministry of Industry, Trade and Labor of the State of Israel, or
the Investment Center, relates to a specific investment program delineated both by its
financial scope, including its capital sources, and by its physical characteristics, for
example, the equipment to be purchased and utilized under the program. The tax benefits
derived from any certificate of approval relate only to taxable income attributable to the
specific approved enterprise. If a company has more than one approval or only a portion of
its capital investments is approved, its effective tax rate is the result of a weighted
average of the applicable rates.

Taxable
income of a company derived from an approved enterprise is subject to corporate tax at the
maximum rate of 25%, rather than the regular corporate tax rates, for the benefit period.
This period is ordinarily seven or ten years depending upon the geographic location of the
approved enterprise within Israel, and whether the company qualifies as a foreign
investors company as described below, commencing with the year in which the approved
enterprise first generates taxable income after the commencement of production. Tax
benefits under the Investments Law may also apply to income generated by a company from
the grant of a usage right with respect to know-how developed by the approved enterprise,
income generated from royalties, and income derived from a service which is auxiliary to
such usage right or royalties, provided that such income is generated within the approved
enterprises ordinary course of business.

A
company owning an approved enterprise may elect to forego certain government grants
extended to an approved enterprise in return for an alternative package of benefits. Under
the alternative package of benefits, a companys undistributed income derived from an
approved enterprise will be exempt from company tax for a period of between two and ten
years from the first year of taxable income after the commencement of production,
depending on the geographic location of the approved enterprise within Israel, and the
company will be eligible for a reduced tax rate for the remainder of the benefits period.
However, this period is limited to twelve years from commencement of production or
fourteen years from the date of approval, whichever is earlier. This limitation does not
apply to the exemption period.

A
company that has an approved enterprise program is eligible for further tax benefits if it
qualifies as a foreign investors company. A foreign investors company is a
company in which more than 25% of its share capital and combined share and loan capital is
owned by non-Israeli residents. A company that qualifies as a foreign investors
company and has an approved enterprise program is eligible for tax benefits for a ten-year
benefit period (instead of seven). Depending on the geographic location of the approved
enterprise within Israel, income derived from the approved enterprise program may be
exempt from tax on its undistributed income for a period of between two and ten years and
will be subject to a reduced tax rate for rest of the benefits period (up to eight years).
The tax rate for the additional benefits period is 25%, unless the level of foreign
investment exceeds 49%, in which case the tax rate is 20% if the foreign investment is 49%
or more and less than 74%; 15% if 74% or more and less than 90%; and 10% if 90% or more. A
company that has elected the alternative package of benefits and that subsequently pays a
dividend out of income derived from the approved enterprise during the tax exemption
period will be subject to tax on the gross amount distributed. The tax rate will be the
rate which would have been applicable had the company not elected the alternative package
of benefits. This rate is generally 10%-25%, depending on the percentage of the
companys shares held by foreign shareholders. The dividend recipient is subject to
withholdings of tax at the source by the company at the reduced rate applicable to
dividends from approved enterprises, which is 15% if the dividend is distributed during
the tax exemption period or within 12 years after the period. This limitation does not
apply to a foreign investors company.

63

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The
benefits available to an approved enterprise are conditional upon the fulfillment of
conditions stipulated in the Investments Law and its regulations and the criteria in the
specific certificate of approval, as described above. If a company does not meet these
conditions, in whole or in part, it would be required to refund the amount of tax
benefits, with the addition of the consumer price index linkage adjustment and interest.

The
Investment Center has granted approved enterprise status to three investment programs at
our former facility in Tel Aviv and we have derived and expect to continue to derive a
substantial portion of our income from these programs. We have elected the alternative
package of benefits under these approved enterprise programs. The portion of our income
derived from these approved enterprise programs will be exempt from tax for a period of
two years commencing in the first year in which there is taxable income after the
commencement of production and will be subject to a reduced company tax of up to 25% for
the subsequent period of five years, or up to eight years if the percentage of non-Israeli
investors who hold our ordinary shares exceeds 25%. The period of tax benefits for our
approved enterprise programs has not yet commenced, because we have yet to realize taxable
income.

Tax Benefits under the
2005 Amendment

On
April 1, 2005, an amendment to the Investments Law (the Amendment) came into
force. The Amendment includes revisions to the criteria for investments qualified to
receive tax benefits as an approved enterprise. The Amendment applies to new investment
programs and investment programs commencing after 2004, and does not apply to investment
programs approved prior to December 31, 2004, whose benefits will remain as they were on
the date of such approval. However, a company that was granted benefits according to
section 51 of the Investments Law (prior to the amendment) would not be allowed to choose
a new tax year as a year of election (as described below) under the new amendment for a
period of 3 years from the companys previous year of commencement under the old
Investment Law.

The
Company will continue to enjoy its current tax benefits in accordance with the provisions
of the Investment Law prior to its revision. However, if the Company is granted any new
benefits in the future, they will be subject to the provisions of the amended Investment
Law. Therefore, the above discussion is a summary of the Investment Law prior to its
amendment and the following is a discussion of the relevant changes contained in the new
legislation.

The
Amendment simplifies the approval process: according to the Amendment, only approved
enterprises receiving cash grants require the approval of the Investment Center. The
Investment Center was entitled to approve such programs only until December 31, 2007.

Tax
benefits are available under the Amendment to production facilities (or other eligible
facilities), which are generally required to derive more than 25% of their business income
from export (referred to as a Benefited Enterprise). In order to receive the
tax benefits, the Amendment states that the company must make an investment in the
Benefited Enterprise exceeding a certain percentage or a minimum amount specified in the
Investments Law. Such investment may be made over a period of no more than three years
ending at the end of the year in which the company requested to have the tax benefits
apply to the Benefited Enterprise (the Year of Election). A company wishing to
receive the tax benefits afforded to a Benefited Enterprise is required to select the tax
year from which the period of benefits under the Investments Law are to commence by
notifying the Israeli Tax Authority within 12 months of the end of that year. Companies
are also granted the right to approach the Israeli Tax Authority for a pre-ruling
regarding their eligibility for benefits under the Amendment. Where the company requests
to have the tax benefits apply to an expansion of existing facilities, then only the
expansion will be considered a Benefited Enterprise and the companys effective tax
rate will be the result of a weighted combination of the applicable rates. In this case,
the minimum investment required in order to qualify as a Benefited Enterprise is required
to exceed a certain percentage or a minimum amount of the companys production assets
before the expansion.

64

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---

The
duration of tax benefits is subject to a limitation of the earlier of 7 to 10 years from
the Commencement Year, or 12 years from the first day of the Year of Election. The tax
benefits granted to a Benefited Enterprise are determined, as applicable to its geographic
location within Israel, according to one of the following new tax routes, which may be
applicable to us:

| |  | Similar
to the currently available alternative route, exemption from corporate tax on
undistributed income for a period of two to ten years, depending on the geographic
location of the Benefited Enterprise within Israel, and a reduced corporate tax rate of
10% to 25% for the remainder of the benefits period, depending on the level of foreign
investment in each year. Benefits may be granted for a term of seven to ten years,
depending on the level of foreign investment in the company. If the company pays a
dividend out of income derived from the Benefited Enterprise during the tax exemption
period, such income will be subject to corporate tax at the applicable rate (10%-25%) in
respect of the gross amount of the dividend that we may distribute. The company is
required to withhold tax at the source at a rate of 15% from any dividends distributed
from income derived from the Benefited Enterprise; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | A
special tax route, which enables companies owning facilities in certain geographical
locations in Israel to pay corporate tax at the rate of 11.5% on income of the Benefited
Enterprise. The benefits period is ten years. Upon payment of dividends, the company is
required to withhold tax at source at a rate of 15% for Israeli residents and at a rate
of 4% for foreign residents.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Generally,
a company that is Abundant in Foreign Investment (owned by at least 74% foreign
shareholders and has undertaken to invest a minimum sum of $20 million in the Beneficiary
Enterprise) is entitled to an extension of the benefits period by an additional five
years, depending on the rate of its income that is derived in foreign currency.

The
Amendment changes the definition of foreign investment in the Investments Law
so that the definition now requires a minimal investment of NIS 5 million by foreign
investors. Furthermore, such definition now also includes the purchase of shares of a
company from another shareholder, provided that the companys outstanding and paid-up
share capital exceeds NIS 5 million. Such changes to the definition of foreign
investment took effect retroactively from 2003.

Among
the results of the Amendment are that (a) tax-exempt income generated under the provisions
of the new law will subject us to taxes upon distribution or liquidation and (b) we may be
required to record a deferred tax liability with respect to such tax-exempt income. As of
December 31, 2008, we did not generate income under the provisions of the new law.

Tax Benefits and Grants
for Research and Development

Israeli
tax law allows, under specific conditions, a tax deduction in the year incurred for
expenditures, including capital expenditures, relating to scientific research and
development projects, for the year in which they are incurred if:

| |  | the
expenditures are approved by the relevant Israeli government ministry, determined by the
              field of research;
| | - | -----------------------------------------------------------------------------------------------------------------------------

| |  | the
research and development is for the promotion or development of the company; and
| | - | ------------------------------------------------------------------------------------

| |  | the
research and development is carried out by or on behalf of the company seeking the
              deduction.
| | - | ---------------------------------------------------------------------------------------------------------------

However,
the amount of such deductible expenses shall be reduced by the sum of any funds received
through government grants for the finance of such scientific research and development
projects. Expenditures not so approved are deductible over a three-year period if the
R&D is for the promotion or development of the company.

65

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

According
to the Law for the Encouragement of Industry (Taxes), 1969, generally referred to as the
Industry Encouragement Law, an industrial company is a company resident in Israel, at
least 90% of the income of which, in a given tax year, determined in Israeli currency
exclusive of income from specified government loans, capital gains, interest and
dividends, is derived from an industrial enterprise owned by it. An industrial enterprise
is defined as an enterprise whose major activity in a given tax year is industrial
production activity.

Under
the Industry Encouragement Law, industrial companies are entitled to the following
preferred corporate tax benefits, among others:

| |  | deduction
of purchases of know-how, patents and the right to use a patent over an eight-year
              period for tax purposes;
| | - | -----------------------------------------------------------------------------------------------------------------------------------

| |  | deduction
over a three-year period of specified expenses incurred with the issuance and listing of
shares on the Tel Aviv Stock Exchange or on a recognized stock exchange outside of Israel
(including Nasdaq);
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
right to elect, under specified conditions, to file a consolidated tax return with
additional related Israeli industrial companies; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------

| |  | accelerated
depreciation rates on equipment and buildings.
| | - | ----------------------------------------------------------

Eligibility
for benefits under the Industry Encouragement Law is not subject to receipt of prior
approval from any governmental authority.

We
believe that we currently qualify as an industrial company within the definition of the
Industry Encouragement Law. We cannot assure you that we will continue to qualify as an
industrial company or that the benefits described above will be available to us in the
future.

Special Provisions
Relating to Taxation under Inflationary Conditions

Under
the Income Tax (Inflationary Adjustments) Law, 1985, results for tax purposes were
measured in real terms in accordance with the changes in the Israeli Consumer Price Index
(Israeli CPI). Accordingly, until 2002, results for tax purposes were measured
in terms of earnings in NIS after certain adjustments for increases in the Israeli CPI.
Commencing in fiscal year 2003, we have elected to measure our taxable income and file our
tax return under the Israeli Income Tax Regulations (Principles Regarding the Management
of Books of Account of Foreign Invested Companies and Certain Partnerships and the
Determination of Their Taxable Income), 1986. Such an election obligated us for three
years. Accordingly, commencing with fiscal year 2003, results for tax purposes are
measured in terms of earnings in dollars. We filed for one-year extensions in 2006 and
2007. Beginning January 1, 2008, the Inflationary Adjustments Law was repealed.

Israeli Capital Gains Tax
on Sales of Shares

Israeli
law imposes a capital gains tax on the sale of any capital assets by residents of Israel,
as defined for Israeli tax purposes, and on the sale of assets located in Israel,
including shares in Israeli companies, by non-residents of Israel, unless a specific
exemption is available or unless a tax treaty between Israel and the shareholders
country of residence provides otherwise. The law distinguishes between real gain and
inflationary surplus. The inflationary surplus is a portion of the total capital gain that
is equivalent to the increase of the relevant assets purchase price which is
attributable to the increase in the Israeli consumer price index or, in certain
circumstances, a foreign currency exchange rate, between the date of purchase and the date
of sale. The real gain is the excess of the total capital gain over the inflationary
surplus.

Generally,
the tax rate applicable to capital gains derived from the sale of shares, whether listed
on a stock market or not, is 20% for Israeli individuals, retroactive from January 1,
2003, unless such shareholder claims a deduction for financing expenses in connection with
such shares, in which case the gain will generally be taxed at a rate of 25%.
Additionally, if such shareholder is considered a significant shareholder at
any time during the 12-month period preceding such sale (i.e. such shareholder holds
directly or indirectly, including jointly with others, at least 10% of any means of
control in the company) the tax rate will be 25%. Israeli companies are subject to the
corporate tax rate on capital gains derived from the sale of publicly-traded shares,
unless such companies were not subject to the Inflationary Adjustments Law (or certain
regulations) as of August 10, 2005, in which case the applicable tax rate is 25%. However,
the foregoing tax rates would not apply to dealers in securities and shareholders who
acquired their shares prior to an initial public offering.

66

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The
tax basis of publicly-traded shares acquired prior to January 1, 2003, will be determined
in accordance with the average closing share price in the three trading days preceding
January 1, 2003. However, a request may be made to the tax authorities to consider the
actual adjusted cost of the shares as the tax basis if it is higher than such average
price.

Non-Israeli
residents are exempt from Israeli capital gains tax on any gains derived from the sale of
shares publicly traded on the TASE, provided such gains did not derive from a permanent
establishment of such shareholders in Israel, and are exempt from Israeli capital gains
tax on any gains derived from the sale of shares of Israeli companies publicly traded on a
recognized stock market outside of Israel (including Nasdaq), provided however that such
capital gains are not derived from a permanent establishment in Israel, that such
shareholders are not subject to the Inflationary Adjustments Law and that such
shareholders did not acquire their shares prior to an initial public offering. However,
non-Israeli corporations will not be entitled to such exemption if an Israeli resident (i)
has a controlling interest of 25% or more in such non-Israeli corporation, or (ii) is the
beneficiary of or is entitled to 25% or more of the revenues or profits of such
non-Israeli corporation, whether directly or indirectly.

In
some instances where our shareholders may be liable to Israeli tax on the sale of their
ordinary shares, the payment of the consideration may be subject to the withholding of
Israeli tax at the source.

Under
the convention between the United States and Israel concerning taxes on income, as amended
(the U.S.-Israel Tax Treaty), generally, Israeli capital gains tax will not
apply to the sale, exchange or disposition of ordinary shares by a person who:

| |  | holds
the ordinary shares as a capital asset; and
| | - | -------------------------------------------------

| |  | qualifies
as a resident of the United States within the meaning of the U.S.-Israel tax treaty;
              and
| | - | ----------------------------------------------------------------------------------------------------------------

| |  | is
entitled to claim the benefits available to the person by the U.S.-Israel tax treaty.
| | - | ----------------------------------------------------------------------------------------

However,
this exemption will not apply if (i) the treaty U.S. resident holds, directly or
indirectly, shares representing 10% or more of our voting power during any part of the
12-month period preceding the sale, exchange or disposition, subject to specified
conditions, or (ii) the capital gains from such sale, exchange or disposition can be
allocated to a permanent establishment in Israel. In this case, the sale, exchange or
disposition would be subject to Israeli tax, to the extent applicable. However, under the
U.S.-Israel tax treaty, the treaty U.S. resident would be permitted to claim a credit for
the taxes against the U.S. federal income tax imposed on the sale, exchange or
disposition, subject to the limitations in U.S. laws applicable to foreign tax credits.
The U.S.-Israel tax treaty does not relate to U.S. state or local taxes.

Israeli Taxation of
Dividends Distributed to Non-Resident Holders of Our Shares

Non-residents
of Israel are subject to income tax on income accrued or derived from sources in Israel.
These sources of income include passive income, including dividends, royalties and
interest, as well as non-passive income from services provided in Israel. On distributions
of dividends other than bonus shares or stock dividends, income tax is withheld at source
at the following rates: (i) for dividends distributed prior to January 1, 2006  25%;
(ii) for dividends distributed on or after January 1, 2006  20%, or 25% for a
shareholder that is considered a significant shareholder at any time during the 12-month
period preceding such distribution; unless a different rate is provided in a treaty
between Israel and the shareholders country of residence. As stated earlier,
dividends of income generated by an approved enterprise are subject to withholding tax at
a rate of 15%.

|    | Dividends not generated by an approved enterprise (or Benefited Enterprise)
|--- | ---------------------------------------------------------------------------
|
|
|
|
|15% | 12.5%                                                                      

67

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Israeli Transfer Pricing
Regulations

On
November 29, 2006, Income Tax Regulations (Determination of Market Terms), 2006,
promulgated under Section 85A of the Tax Ordinance, came into effect (the TP
Regs). Section 85A of the Tax Ordinance and the TP Regs generally requires that all
cross-border transactions carried out between related parties be conducted on an
arms length principle basis and will be taxed accordingly. The TP Regs have not had
a material effect on the Company.

U.S. Federal Income Tax
Considerations

Subject
to the limitations described below, the following discussion summarizes certain U.S.
federal income tax consequences of the purchase, ownership and disposition of our ordinary
shares to a U.S. holder that owns our ordinary shares as a capital asset (generally, for
investment). A U.S. holder is a holder of our ordinary shares that is for U.S. federal
income tax purposes:

| |  | an
individual citizen or resident of the United States;
| | - | -------------------------------------------------------

| |  | a
corporation (or other entity taxable as a corporation for U.S. federal income tax
purposes)               created or organized in the United States or under the laws of
the United States, any               political subdivision thereof or the District of
Columbia;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | an
estate, the income of which is subject to U.S. federal income tax regardless of its
source; or
| | - | -------------------------------------------------------------------------------------------------

| |  | a
trust if (i) a court within the United States is able to exercise primary supervision
over               its administration and one or more U.S. persons have the authority to
control all of its               substantial decisions or (ii) that has in effect a valid
election under applicable U.S.               Treasury Regulations to be treated as a U.S.
person.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

If
a partnership (or any other entity treated as a partnership for U.S. federal income tax
purposes) holds our ordinary shares, the tax treatment of the partnership and a partner in
such partnership will generally depend on the status of the partner and the activities of
the partnership. Such a partner or partnership should consult its own tax advisor as to
its tax consequences.

Certain
aspects of U.S. federal income taxes relevant to a holder of our ordinary shares (other
than a partnership) that is not a U.S. holder (a Non-U.S. holder) are also
discussed below.

This
discussion is based on current provisions of the Internal Revenue Code of 1986, as amended
(the Code), current and proposed Treasury Regulations, and administrative and
judicial decisions as of the date of this annual report, all of which are subject to
change, possibly on a retroactive basis. This discussion does not address all aspects of
U.S. federal income taxation that may be relevant to any particular U.S. holder in light
of the holders individual circumstances. In particular, this discussion does not
address the potential application of the alternative minimum tax or the U.S. federal
income tax consequences to U.S. holders that are subject to special treatment, including
U.S. holders that:

| |  | are
broker-dealers or insurance companies;
| | - | ------------------------------------------

| |  | have
elected mark-to-market accounting;
| | - | ---------------------------------------

| |  | are
tax-exempt organizations or retirement plans;
| | - | -------------------------------------------------

| |  | are
grantor trusts;
| | - | -------------------

| |  | are
certain former citizens or long-term residents of the United States;
| | - | ------------------------------------------------------------------------

| |  | are
financial institutions or financial services entities;
| | - | ----------------------------------------------------------

| |  | hold
ordinary shares as part of a straddle, hedge or conversion transaction with other
              investments;
| | - | -----------------------------------------------------------------------------------------------------------------

| |  | acquired
their ordinary shares upon the exercise of employee stock options or otherwise as
              compensation;
| | - | ----------------------------------------------------------------------------------------------------------------------

| |  | are
real estate investment trusts or regulated investment companies;
| | - | --------------------------------------------------------------------

| |  | own
directly, indirectly or by attribution at least 10% of our voting power; or
| | - | -------------------------------------------------------------------------------

| |  | have
a functional currency that is not the U.S. dollar.
| | - | -------------------------------------------------------

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This
discussion is not a comprehensive description of all of the tax considerations that may be
relevant to each persons decision to purchase our ordinary shares. For example, this
discussion does not address any aspect of state, local or non-U.S. tax laws or the
possible application of United States federal gift or estate taxes.

Each
holder of our ordinary shares is advised to consult his or her own tax advisor with
respect to the specific tax consequences to him or her of purchasing, owning or disposing
of our ordinary shares, including the applicability and effect of federal, state, local
and foreign income and other tax laws to his or her particular circumstances.

Taxation of Distributions
Paid on Ordinary Shares

Subject
to the discussion below under Tax Consequences if We Are a Passive Foreign
Investment Company, a U.S. holder will be required to include in gross income as
dividend income the amount of any distribution paid on our ordinary shares, including any
non-U.S. taxes withheld from the amount paid, on the date the distribution is received to
the extent the distribution is paid out of our current or accumulated earnings and profits
as determined for U.S. federal income tax purposes. Distributions in excess of earnings
and profits will be applied against and will reduce the U.S. holders tax basis in
its ordinary shares and, to the extent in excess of that basis, will be treated as gain
from the sale or exchange of ordinary shares. The dividend portion of such distribution
generally will not qualify for the dividends received deduction otherwise available to
corporations.

Dividends
that are received by U.S. holders that are individuals, estates or trusts will be taxed at
the rate applicable to long-term capital gains (currently a maximum rate of 15% for
taxable years beginning on or before December 31, 2010), provided that such dividends meet
the requirements of qualified dividend income. Subject to the holding period
and risk-of-loss requirements discussed below, dividends paid by a foreign corporation
that is not a passive foreign investment company (as discussed below) will be qualified
dividend income if the stock with respect to which the dividend is paid is readily
tradable on an established securities market in the United States such as the Nasdaq
Global Market. Dividends that fail to meet such requirements, and dividends received by
corporate U.S. holders, are taxed at ordinary income rates. No dividend received by a U.S.
holder will be a qualified dividend if (1) the U.S. holder held the ordinary share with
respect to which the dividend was paid for less than 61 days during the 121-day period
beginning on the date that is 60 days before the ex-dividend date with respect to such
dividend, excluding for this purpose, under the rules of Code Section 246(c), any period
during which the U.S. holder has an option to sell, is under a contractual obligation to
sell, has made and not closed a short sale of, is the grantor of a deep-in-the-money or
otherwise nonqualified option to buy, or has otherwise diminished its risk of loss by
holding other positions with respect to, such ordinary share (or substantially identical
securities) or (2) the U.S. holder is under an obligation (pursuant to a short sale or
otherwise) to make related payments with respect to positions in property substantially
similar or related to the ordinary share with respect to which the dividend is paid. If we
were to be a passive foreign investment company (as such term is defined in
the Code) for any year, dividends paid on our ordinary shares in such year or in the
following year would not be qualified dividends. In addition, a non-corporate U.S. holder
will be able to take a qualified dividend into account in determining its deductible
investment interest (which is generally limited to its net investment income) only if it
elects to do so; in such case the dividend will be taxed at ordinary income rates.

Distributions
of current or accumulated earnings and profits paid in foreign currency to a U.S. holder
(including any non-U.S. taxes withheld from the distributions) will be includible in the
income of a U.S. holder in a dollar amount calculated by reference to the exchange rate on
the date of the distribution. A U.S. holder that receives a foreign currency distribution
and converts the foreign currency into dollars after the date of distribution may have
foreign exchange gain or loss based on any appreciation or depreciation in the value of
the foreign currency against the dollar, which will generally be U.S. source ordinary
income or loss.

U.S.
          holders will have the option of claiming the amount of any non-U.S. income
taxes           withheld at source either as a deduction from gross income or as a
          dollar-for-dollar credit against their U.S. federal income tax liability.
          Individuals who do not claim itemized deductions, but instead utilize the
          standard deduction, may not claim a deduction for the amount of the non-U.S.
          income taxes withheld, but the amount may be claimed as a credit against the
          individuals U.S. federal income tax liability. The amount of non-U.S.
          income taxes that may be claimed as a credit in any year is subject to complex
          limitations and restrictions, which must be determined on an individual basis
by           each shareholder. These limitations include rules which limit foreign tax
          credits allowable for specific classes of income to the U.S. federal income
          taxes otherwise payable on each such class of income.

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The
total amount of allowable foreign tax credits in any year cannot exceed the pre-credit
U.S. tax liability for the year attributable to non-U.S. source taxable income.
Distributions of current or accumulated earnings and profits will generally be non-U.S.
source passive income for U.S. foreign tax credit purposes;

A
U.S. holder will be denied a foreign tax credit for non-U.S. income taxes withheld from a
dividend received on the ordinary shares if (1) the U.S. holder has not held the ordinary
shares for at least 16 days of the 31-day period beginning on the date which is 15 days
before the ex-dividend date with respect to such dividend or (2) to the extent the U.S.
holder is under an obligation to make related payments with respect to positions in
substantially similar or related property. Any days during which a U.S. holder has
substantially diminished its risk of loss on the ordinary shares are not counted toward
meeting the required 16-day holding period.

Taxation of the
Disposition of Ordinary Shares

Subject
to the discussion below under Tax Consequences if We Are a Passive Foreign
Investment Company, upon the sale, exchange or other disposition of our ordinary
shares, a U.S. holder will recognize capital gain or loss in an amount equal to the
difference between the U.S. holders basis in the ordinary shares, which is usually
the cost to the U.S. holder of the ordinary shares, and the amount realized on the
disposition. Capital gain from the sale, exchange or other disposition of ordinary shares
held more than one year will be long-term capital gain and may, in the case of
non-corporate U.S. holders, be subject to a reduced rate of taxation (long-term capital
gains are currently taxable at a maximum rate of 15% for taxable years beginning on or
before December 31, 2010). Gain or loss recognized by a U.S. holder on a sale, exchange or
other disposition of ordinary shares will generally be treated as U.S. source income for
U.S. foreign tax credit purposes. The deductibility of a capital loss recognized on the
sale, exchange or other disposition of ordinary shares is subject to limitations.

A
U.S. holder that uses the cash method of accounting calculates the dollar value of the
proceeds received on the sale as of the date that the sale settles. However, a U.S. holder
that uses the accrual method of accounting is required to calculate the value of the
proceeds of the sale as of the trade date and may therefore realize foreign currency gain
or loss. A U.S. holder may avoid realizing foreign currency gain or loss if he or she has
elected to use the settlement date to determine its proceeds of sale for purposes of
calculating the foreign currency gain or loss. In addition, a U.S. holder that receives
foreign currency upon disposition of ordinary shares and converts the foreign currency
into dollars after the settlement date or trade date (whichever date the U.S. holder is
required to use to calculate the value of the proceeds of sale) will have foreign exchange
gain or loss based on any appreciation or depreciation in the value of the foreign
currency against the dollar, which will generally be U.S. source ordinary income or loss.

Tax Consequences if We
Are a Passive Foreign Investment Company

For
U.S. federal income tax purposes, we will be classified as a passive foreign investment
company, or PFIC, for any taxable year in which either, after applying certain
look-through rules, (i) 75% or more of our gross income is passive income or (ii) at least
50% of the average value of our total assets (determined on a quarterly basis) for the
taxable year produce or are held for the production of passive income (the Asset
Test). For this purpose, cash is considered to be an asset which produces passive
income. Passive income includes dividends, interest, royalties, rents, annuities and the
excess of gains over losses from the disposition of certain assets which produce passive
income.

Based
on our income, assets, activities and market capitalization, we do not believe that we
were a PFIC for the taxable year ended December 31, 2008. However, there can be no
assurances that the United States Internal Revenue Service (IRS) will not
challenge this conclusion. If we were not a PFIC for 2008, U.S. holders who acquired our
ordinary shares in 2008 will not be subject to the PFIC rules described below (regardless
as to whether we were a PFIC in any prior years) unless we are classified as a PFIC in
future years. The tests for determining PFIC status are applied annually and it is
difficult to make accurate predictions of our future income, assets, activities and market
capitalization, including fluctuations in the price of our ordinary shares, which are
relevant to this determination.

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If
we are a PFIC, a U.S. holder of our ordinary shares could be subject to increased tax
liability upon the sale or other disposition (including gain deemed recognized if the
ordinary shares are used as security for a loan) of its ordinary shares or upon the
receipt of amounts treated as excess distributions, which could result in a
reduction in the after-tax return to such U.S. holder. In general, a excess distribution
is the amount of distributions received during a taxable year that exceed 125% of the
average amount of distributions received by a U.S. holder in respect of the ordinary
shares during the preceding three taxable years, or if shorter, during the U.S.
holders holding period prior to the taxable year of the distribution. Under these
rules, the excess distribution and any gain on the disposition of ordinary shares would be
allocated ratably over the U.S. holders holding period for the ordinary shares. The
amount allocated to the current taxable year and any taxable year prior to the first
taxable year in which we were a PFIC would be taxed as ordinary income. The amount
allocated to each of the other taxable years would be subject to tax at the highest
marginal rate in effect for the applicable class of taxpayer for that taxable year, and an
interest charge for the deemed deferral benefit would be imposed on the resulting tax
allocated to such other taxable years. The tax liability with respect to the amount
allocated to taxable years prior to the year of the disposition or distribution cannot be
offset by net operating losses. In addition, holders of stock in a PFIC may not receive a
step-up in basis on shares acquired for a decedent.

As
an alternative to the tax treatment described above, a U.S. holder could elect to treat us
as a qualified electing fund (QEF), in which case the U.S. holder
would be required to include in income, for each taxable year that we are a PFIC, its pro
rata share of our ordinary earnings as ordinary income and its pro rata share of our net
capital gains as capital gain, subject to a separate election to defer payment of taxes
which deferral is subject to an interest charge. We will supply U.S. holders that make a
request in writing with the information needed to report income and gain under a QEF
election if we are a PFIC. Any income inclusion will be required whether or not such U.S.
holder owns our ordinary shares for an entire taxable year or at the end of our taxable
year. The amount so includible will be determined without regard to our prior year losses
or the amount of cash distributions, if any, received from us. Special rules apply if a
U.S. holder makes a QEF election after the first year in its holding period in which we
are a PFIC. A U.S. holders basis in its ordinary shares will increase by any amount
included in income and decrease by any amounts not included in income when distributed
because such amounts were previously taxed under the QEF rules. So long as a U.S.
holders QEF election is in effect with respect to the entire holding period for its
ordinary shares, any gain or loss realized by such holder on the disposition of its
ordinary shares held as a capital asset ordinarily would be capital gain or loss. Such
capital gain or loss ordinarily would be long-term if such U.S. holder had held such
ordinary shares for more than one year at the time of the disposition. For non-corporate
U.S. holders, long-term capital gain is generally subject to a maximum federal income tax
rate of 15% for taxable years beginning on or before December 31, 2010. The QEF election
is made on a shareholder-by-shareholder basis, applies to all ordinary shares held or
subsequently acquired by an electing U.S. holder and can be revoked only with the consent
of the IRS.

Although
a U.S. holder normally is not permitted to make a retroactive QEF election, a retroactive
election may be made for a taxable year of the U.S. holder (the retroactive election
year) if the U.S. holder (i) reasonable believed that, as of the date the QEF
election was due, the foreign corporation was not a PFIC for its taxable year that ended
during the retroactive election year and (ii) filed a protective statement with respect to
the foreign corporation, applicable to the retroactive election year, in which the U.S.
holder described the basis for its reasonable belief and extended the period of limitation
on the assessment of taxes determined under Sections 1291 through 1298 of the Code with
respect to the foreign corporation (PFIC related taxes) for all taxable years of the
shareholder to which the protective statement applies. We will supply U.S. holders that
make a request in writing with the information needed to report income and gain under a
QEF election if we are a PFIC.

As
an alternative to making a QEF election, a U.S. holder of PFIC stock which is
marketable stock (e.g., regularly traded on the Nasdaq Global
Market) may in certain circumstances avoid certain of the tax consequences generally
applicable to holders of stock in a PFIC by electing to mark the stock to market as of the
beginning of such U.S. holders holding period for the ordinary shares. As a result
of such election, in any taxable year that we are a PFIC, a U.S. holder would generally be
required to report gain or loss to the extent of the difference between the fair market
value of the ordinary shares at the end of the taxable year and such U.S. holders
tax basis in its ordinary shares at that time. Any gain under this computation, and any
gain on an actual disposition of the ordinary shares, would be treated as ordinary income.
Any loss under this computation, and any loss on an actual disposition of the ordinary
shares, generally would be treated as ordinary loss to the extent of the cumulative
net-mark-to-market gain previously included. Any remaining loss from marking ordinary
shares to market will not be allowed, and any remaining loss from an actual disposition of
ordinary shares generally would be capital loss. A U.S. holders tax basis in its
ordinary shares is adjusted annually for any gain or loss recognized under the
mark-to-market election. There can be no assurances that there will be sufficient trading
volume with respect to the ordinary shares for the ordinary shares to be considered
regularly traded or that our ordinary shares will continue to trade on the
Nasdaq GLobalMarket. Accordingly, there are no assurances that the ordinary shares will be
marketable stock for these purposes. As with a QEF election, a mark-to-market election is
made on a shareholder-by-shareholder basis, applies to all ordinary shares held or
subsequently acquired by an electing U.S. holder and can only be revoked with consent of
the IRS (except to the extent the ordinary shares no longer constitute marketable
stock).

71

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The
U.S. federal income tax consequences to a U.S. holder if we were to be classified as a
PFIC in 2008 or any previous taxable year are complex. A U.S. holder should consult with
his or her own advisor with regard to those consequences, as well as with regard to
whether he or she should make either of the elections described above.

Tax Consequences for
Non-U.S. Holders of Ordinary Shares

Except
as described in Information Reporting and Back-up Withholding below, a
Non-U.S. holder of ordinary shares will not be subject to U.S. federal income or
withholding tax on the payment of dividends on, and the proceeds from the disposition of,
our ordinary shares, unless in the case of U.S. federal income taxes:

| |  | the
item is effectively connected with the conduct by the Non-U.S. holder of a trade or
business in the United States and in the case of a resident of a country which has a
treaty with the United States, the item is attributable to a permanent establishment, or
in the case of an individual, the item is attributable to a fixed place of business in
the United States; or
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
Non-U.S. holder is an individual who holds the ordinary shares as a capital asset and is
present in the United States for 183 days or more in the taxable year of the disposition
and certain other conditions are met.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Information Reporting and
Back-up Withholding

U.S.
          holders generally are subject to information reporting requirements with
respect           to dividends paid in the United States on, or proceeds from the
disposition of,           our ordinary shares. In addition, a U.S. holder may be subject,
under certain           circumstances, to backup withholding at a rate of up to 28% with
respect to           dividends paid on, or proceeds from the disposition of, our ordinary
shares           unless the U.S. holder provides proof of an applicable exemption or
correct           taxpayer identification number and otherwise complies with the
applicable           requirements of the backup withholding rules. A U.S. holder of our
ordinary           shares who provides an incorrect taxpayer identification number may be
subject           to penalties imposed by the IRS. Amounts withheld under the backup
withholding           rules are not an additional tax and may be refunded or credited
against the U.S.           holders federal income tax liability, provided the
required information is           furnished to the IRS.

Non-U.S.
          holders generally are not subject to information reporting or back-up
          withholding with respect to dividends paid in the United States on, or proceeds
          from the disposition of, our ordinary shares, provided that the Non-U.S. holder
          provides a taxpayer identification number, certifies to its foreign status, or
          establishes another exemption to the information reporting or back-up
          withholding requirements.

# Documents on Display

We
are subject to the informational requirements of the Securities Exchange Act of 1934, as
amended, applicable to foreign private issuers and fulfill the obligations with respect to
such requirements by filing reports with the SEC. These reports include certain financial
and statistical information about us, and may be accompanied by exhibits. You may read and
copy any document we file with the SEC at the SECs Public Reference Room at100 F
Street, N.E., Room 1580, Washington D.C. 20549. Please call the SEC at 1-800-SEC-0330 for
further information on the public reference rooms.

The
SEC maintains an Internet website at http://www.sec.gov that contains reports, proxy
statements, information statements and other material that are filed through the
SECs Electronic Data Gathering, Analysis and Retrieval (EDGAR) system.

You
may also visit us on the World Wide Web at www.ceragon.com. However, information contained
on our website does not constitute a part of this Annual Report.

72

---

---

|ITEM 11. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|-------- |  | ----------------------------------------------------------

We
do not use derivative financial instruments for trading purposes. Accordingly, we have
concluded that there is no material market risk exposure of the type contemplated by Item
11, and that no quantitative tabular disclosures are required. We are exposed to certain
other types of market risks, as described below.

We
are exposed to financial market risk associated with changes in foreign currency exchange
rates. A majority of our revenue is generated, and a substantial portion of our expenses
is incurred, in dollars. A portion of our expenses, however, is denominated mainly in NIS.
Since our financial results are reported in dollars, fluctuations in the rates of exchange
between the dollar and non-dollar currencies may have an effect on our results of
operations. In order to reduce such effect, we hedge a portion of certain cash flow
transactions denominated in non-dollar currencies as well as a portion of certain monetary
items in the balance sheet, such as trade receivables and trade payables, denominated in
non-dollar currencies. The following sensitivity analysis assumes an instantaneous 10%
change in foreign currency exchange rates from year-end levels, with all other variables
held constant. At December 31, 2008, a 10% strengthening of the U.S. dollar versus other
currencies would have resulted in an increase of approximately $900 thousand in our net
assets position, while a 10% weakening of the dollar versus all other currencies would
have resulted in a decrease of approximately $900 thousand.

The
counter-parties to our hedging transactions are major financial institutions with high
credit ratings. As of December 31, 2008, we had forward contracts to sell up to $22.6
million for a total amount of approximately NIS 86.6 million (that would mature on or
before December 31, 2009), and forward contracts to sell up to 3.0 million for a
total of approximately $4.2 million (that would mature on March 31, 2009). During the year
ended December 31, 2008 we recognized a profit of $1.4 million as a result of derivative
instruments.

We
invest in investment grade U.S. corporate and government bonds and dollar deposits with
banks. Since these investments typically carry fixed interest rates and since our policy
and practice is to hold these investments to maturity, financial income over the holding
period is not sensitive to changes in interest rates.

We
do not invest in interest rate derivative financial instruments.

|ITEM 12. |  | DESCRIPTION
OF SECURITIES OTHER THAN EQUITY SECURITIES.
|-------- |  | -------------------------------------------------------

Not applicable.

# PART II

|ITEM  13. |  | DEFAULTS,
DIVIDEND ARREARAGES AND DELINQUENCIES.
|--------- |  | ------------------------------------------------

None.

|ITEM 14. |  | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS.
|-------- |  | -----------------------------------------------------------------------------

# Amendment to Articles

In October, 2007, our shareholders approved
an amendment to our Memorandum of Association and Articles of Association to reflect an
increase in the registered share capital of the Company from NIS 400,000 divided into 40
million shares to NIS 600,000 divided into 60 million shares of a nominal value of One
Agora (NIS 0.01) each.

This amendment was described in Item
A of our Notice and Proxy Statement for the Annual General Meeting of our shareholders
held on October 25, 2007, included in our report on Form 6-K, furnished to the SEC on
September 24, 2007, which is incorporated herein by reference. The text of the amendments
to our Memorandum and Articles of Association as amended in October 2007 are incorporated
herein by reference.

# Use of Proceeds

As
of December 31, 2008, approximately 70% of the net offering proceeds remaining from our
initial public offering and from our follow-on offering was invested in short-term
investments. The 30% balance of the net offering proceeds was invested in long-term
investments. During fiscal year 2008, we used the proceeds for capital expenditures,
repurchase of the Companys shares and general corporate purposes.

73

---

---

|ITEM 15. |  | CONTROLS AND PROCEDURES
|-------- |  | -----------------------

(a)
Disclosure Controls and Procedures

The
Company performed an evaluation of the effectiveness of its disclosure controls and
procedures that are designed to ensure that the material financial and non-financial
information required to be disclosed to the SEC is recorded, processed, summarized and
reported timely. Based on the Companys evaluation, the Companys management,
including the CEO and CFO, has concluded that the Companys disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of
1934, as amended) as of the end of the period covered by this report are effective.
Notwithstanding the foregoing, there can be no assurance that the Companys
disclosure controls and procedures will detect or uncover all failures of persons within
Ceragon to disclose material information otherwise required to be set forth in the
Companys reports.

(b)
Managements Report on Internal Control Over Financial Reporting

The
Company performed an evaluation of the effectiveness of its internal control over
financial reporting that is designed by, or under the supervision of, the Companys
principal executive and principal financial officers, and effected by the Companys
board of directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting
principles and includes those policies and procedures that:

| | (i)
          Pertain to the maintenance of records that in reasonable detail accurately and
          fairly reflect the transactions and dispositions of the assets of the Company;
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (ii)
          Provide reasonable assurance that transactions are recorded as necessary to
          permit preparation of financial statements in accordance with generally
accepted           accounting principles, and that receipts and expenditures of the
Company are           being made only in accordance with authorizations of management and
directors of           the Company; and
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (iii)
          Provide reasonable assurance regarding prevention or timely detection of
          unauthorized acquisition, use or disposition of the Companys assets that
          could have a material effect on the financial statements.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Under
the supervision and with the participation of our management, including our principal
executive officer and principal financial officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting as of December 31, 2008
based on the framework for Internal Control-Integrated Framework set forth by the
Committee of Sponsoring Organizations of the Treadway Commission.

Based
on the Companys evaluation, our management, including the CEO and CFO, has concluded
that the Companys internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, as amended) as of the end
of the period covered by this report are effective. Notwithstanding the foregoing, there
can be no assurance that the Companys internal control over financial reporting will
detect or uncover all failures of persons within Ceragon to comply with these procedures.

(c)
Attestation Report of Independent Registered Public Accounting Firm

Kost Forer
Gabbay & Kasierer, a Member of Ernst & Young Global, our independent registered
public accounting firm, has issued an attestation report on the effectiveness of our
internal control over financial reporting, appearing under Item 18. Financial
Statements on page F-3, and such report is incorporated herein by reference.

74

---

---

(d)
Changes in Internal Controls Over Financial Reporting

There
were no changes in the Companys internal control over financial reporting that
occurred during the year ended December 31, 2008 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.

|ITEM 16. |  | [RESERVED]
|-------- |  | ----------

|ITEM 16A. |  | AUDIT COMMITTEE FINANCIAL EXPERT
|--------- |  | --------------------------------

The
Companys board of directors has determined that Mr. Joseph Atsmon is the audit
committee financial expert. Mr. Atsmon is one of our independent directors for the
purposes of the Nasdaq Rules.

|ITEM 16B. |  | CODE OF ETHICS
|--------- |  | --------------

In
November 2003, the Companys board of directors adopted a Code of Ethics that applies
to the chief executive officer, chief financial officer and controller. In October 2008,
we amended our Code of Ethics in order to update it and expand its applicability to
additional senior officers. A copy of the Companys Code of Ethics may be obtained,
without charge, upon a written request addressed to the Companys investor relations
department, 24 Raoul Wallenberg Street, Tel Aviv 69719, Israel (Telephone no.
+972-3-645-5733) (e-mail: ir@ceragon.com).

|ITEM 16C. |  | PRINCIPAL ACCOUNTANT FEES AND SERVICES
|--------- |  | --------------------------------------

# Fees Paid to Independent
Registered Public Accounting Firm

The
following table sets forth, for each of the years indicated, the fees billed by our
independent registered public accounting firm and the percentage of each of the fees out
of the total amount billed by the auditors.

|                 | Year Ended December 31,
|---------------- | -----------------------
|
|
|
|
|Audit (1)        |                        
|Audit-related(2) |                        
|Tax (3)          |                        
|                 |                        
|Total            |                        

|(1) | Audit
fees consist of services that would normally be provided in connection
               with statutory and regulatory filings or engagements, including services
that                generally only the independent accountant can reasonably provide.
These fees                include fees for the audit of internal control over financial
reporting and the                work related to our follow-on equity offering that
occurred in 2007.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Audit-related
fees relate to assurance and associated services that                traditionally are
performed by the independent registered public accounting                firm, including:
accounting consultation and consultation concerning financial                accounting
and reporting standards.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Tax
fees relate to tax compliance, planning and advice.
|--- | -------------------------------------------------------

# Policies and Procedures

Our
Audit Committee has adopted a policy and procedures for approval of audit and non-audit
services rendered by our independent auditors, Kost Forer Gabbay & Kasierer, a Member
of Ernst & Young Global. The policy requires the Audit Committees approval of
the scope of the engagement of our independent auditor. The policy prohibits retention of
the independent auditors to perform the prohibited non-audit functions defined in Section
201 of the Sarbanes-Oxley Act of 2002 or the rules of the SEC, and also considers whether
proposed services are compatible with the independence of the public auditors.

75

---

---

|ITEM 16D. |  | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
|--------- |  | ----------------------------------------------------------

None.

|ITEM 16E. |  | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
|--------- |  | ----------------------------------------------------------------------

The chart below provides information
on our purchases of our ordinary shares during the year ended December 31, 2008:

# Issuer Purchases of
Equity Securities

|Period                                 | Total
Number of
Shares
Purchased | Average
Price Paid
per Share | Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs (1) | Maximum Number (or
Approximate Dollar Value)
of Shares that May Yet Be
Purchased Under the Plan or
Programs (1)
|-------------------------------------- | -------------------------------- | ---------------------------- | ------------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------------------
|
|
|
|
|January 1 through January 31, 2008     | 0                                | N/A                          | 0                                                                                    | N/A                                                                                                            
|February 1 through February 29, 2008   | 0                                | N/A                          | 0                                                                                    | N/A                                                                                                            
|March 1 through March 31, 2008         | 0                                | N/A                          | 0                                                                                    | N/A                                                                                                            
|April 1 through April 30, 2008         | 0                                | N/A                          | 0                                                                                    | N/A                                                                                                            
|May 1 through May 31, 2008             | 0                                | N/A                          | 0                                                                                    | N/A                                                                                                            
|June 1 through June 30, 2008           | 0                                | N/A                          | 0                                                                                    | N/A                                                                                                            
|July 1 through July 31, 2008           | 0                                | N/A                          | 0                                                                                    | N/A                                                                                                            
|August 1 through August 31, 2008       | 0                                | N/A                          | 0                                                                                    | N/A                                                                                                            
|September 1 through September 30, 2008 | 0                                | N/A                          | 0                                                                                    | N/A                                                                                                            
|October 1 through October 31, 2008     | 0                                | N/A                          | 0                                                                                    | N/A                                                                                                            
|November 1 through November 30, 2008   | 812,792                          | $5.35                        | 812,792                                                                              | $15,655,236                                                                                                    
|December 1 through December 31, 2008   | 687,011                          | $5.15                        | 1,499,803                                                                            | $12,115,026                                                                                                    

| | (1) | On
October 27, 2008, our board of directors authorized a share repurchase
               program under which the total amount to be paid for the repurchase of
shares                would not exceed $20 million. The timing and the amounts purchased
will be at                the Companys discretion, and the purchases may occur in
the open market or                in negotiated or block transactions, all subject to
regulatory requirements. As                of December 31, 2008, we had purchased
1,499,803 shares at a weighted average                price per share of approximately
$5.28 per share.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|ITEM 16F. |  | CHANGE IN REGISTRANTS CERTIFYING ACCOUNTANT
|--------- |  | --------------------------------------------

Not applicable.

76

---

---

|ITEM 16G. |  | CORPORATE GOVERNANCE
|--------- |  | --------------------

The
Nasdaq Rules provide that foreign private issuers may follow home country practice in lieu
of the certain qualitative listing requirements subject to certain exceptions and except
to the extent that such exemptions would be contrary to U.S. federal securities laws, so
long as the foreign issuer discloses that it does not follow such listing requirement and
describes the home country practice followed in its reports filed with the SEC. The
practices we follow in lieu of Nasdaq Rules are described below:

The
Nasdaq Rules require shareholder approval of stock option plans available to officers,
directors or employees. We have decided to follow home country practice in lieu of
obtaining shareholder approval for our share option plans. We seek shareholder approval
for the adoption or amendment of share option plans only as required by our share option
plans and Articles of Association and under Israeli law. Subject to exceptions permitted
under the Companies Law, we are required to seek shareholder approval of any grants of
share options to directors and controlling shareholders or plans that require shareholder
approval for other reasons.

# PART III

|ITEM 17. |  | FINANCIAL STATEMENTS
|-------- |  | --------------------

Not applicable.

|ITEM 18. |  | FINANCIAL STATEMENTS
|-------- |  | --------------------

The
Consolidated Financial Statements and related notes thereto required by this item are
contained on pages F-1 through F-34 hereof.

|Index to Consolidated Financial Statements                                                         | PAGE      
|-------------------------------------------------------------------------------------------------- | ----------
|
|
|
|
|Reports of Independent Registered Public Accounting Firm                                           | F-2 - F-3 
|Consolidated Balance Sheets at December 31, 2008 and 2007                                          | F-4 - F-5 
|Consolidated Statements of Operations for the Years Ended December 31, 2008, 2007 and 2006         | F-6       
|Statements of Changes in Shareholders Equity for the Years Ended December 31, 2008, 2007 and 2006 | F-7       
|Consolidated Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and 2006         | F-8       
|Notes to Consolidated Financial Statements                                                         | F-9 - F-34

|ITEM 19. |  | EXHIBITS
|-------- |  | --------

|1.1 |  | Memorandum
of Association, as amended October 25, 2007 (English translation)*
|--- |  | -----------------------------------------------------------------------------

|1.2 |  | Articles
of Association, as amended October 25, 2007 *
|--- |  | ------------------------------------------------------

|4.1 |  | Tenancy
Agreement, dated as of February 22, 2000, by and among the Company, Zisapel Properties
Ltd. and Klil & Michael Properties Ltd. (English translation)**
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------

|8.1 |  | List
of Subsidiaries
|--- |  | --------------------

|10.1 |  | Consent
of Independent Registered Public Accounting Firm
|---- |  | --------------------------------------------------------

|12.1 |  | Certification
by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|---- |  | --------------------------------------------------------------------------------------------------

|12.2 |  | Certification
by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|---- |  | --------------------------------------------------------------------------------------------------

|13.1 |  | Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|---- |  | ----------------------------------------------------------------------------------------------------------------------

* Previously filed as exhibits 1.1
and 1.2 to the Companys Annual Report on Form 20-F for the year 2007 and
incorporated herein by reference.

** Previously filed as exhibit 10.3
in connection with the Companys Registration Statement on Form F-1 (Registration
Statement 333-12312) on August 3, 2000 and incorporated herein by reference.

77

---

---

# SIGNATURE

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

|CERAGON NETWORKS LTD. By: /s/ Ira Palti 
Ira PaltiPresident and Chief Executive Officer
|-----------------------------------------------------------------------------------------------------

Date: April 1, 2009



---

---

# CERAGON NETWORKS LTD.
AND ITS SUBSIDIARIES

# CONSOLIDATED FINANCIAL
STATEMENTS

# AS OF DECEMBER 31, 2008

# IN U.S. DOLLARS

# INDEX

|                                                        | Page      
|------------------------------------------------------- | ----------
|
|
|
|
|Report of Independent Registered Public Accounting Firm | F-2 - F-3 
|                                                       
|Consolidated Balance Sheets                             | F-4 - F-5 
|                                                       
|Consolidated Statements of Operations                   | F-6       
|                                                       
|Statements of Changes in Shareholders' Equity           | F-7       
|                                                       
|Consolidated Statements of Cash Flows                   | F-8       
|                                                       
|Notes to Consolidated Financial Statements              | F-9 - F-34

F - 1

---

---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
Ceragon Networks Ltd.

We
have audited the accompanying consolidated balance sheets of Ceragon Networks Ltd. (the
Company) and subsidiaries as of December 31, 2007 and 2008, and the related
consolidated statements of operations, changes in shareholders equity and cash flows
for each of the three years in the period ended December 31, 2008. These consolidated
financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated financial statements based
on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above, present fairly, in all material
respects, the consolidated financial position of the Company and subsidiaries at
December 31, 2007 and 2008, and the consolidated results of their operations and
their cash flows for each of the three years in the period ended December 31, 2008, in
conformity with U.S. generally accepted accounting principles.

We
also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Companys internal control over financial
reporting as of December 31, 2008, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated April 1, 2009 expressed an unqualified
opinion thereon.

|                 |                                 
|---------------- | --------------------------------
|
|
|
|
|Tel-Aviv, Israel | KOST FORER GABBAY & KASIERER    
|April 1, 2009    | A Member of Ernst & Young Global

F - 2

---

---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL  CONTROL OVER FINANCIAL REPORTING
To the Shareholders and Board of Directors of
Ceragon Networks Ltd.

We
have audited Ceragon Networks Ltd.s (the Company) internal control over
financial reporting as of December 31, 2008, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). The Companys management is
responsible for maintaining effective internal control over financial reporting and for
its assessment of the effectiveness of internal control over financial reporting included
in the accompanying managements report on internal control over financial reporting.
Our responsibility is to express an opinion on the Companys internal control over
financial reporting based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included obtaining
an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.

A
companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted
accounting principles. A companys internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may
deteriorate.

In
our opinion, the Company maintained in all material respects, effective internal control
over financial reporting as of December 31, 2008, based on the COSO criteria.

We
also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of the Company and
subsidiaries as of December 31, 2007 and 2008, and the related consolidated statements of
operations, changes in shareholders equity and cash flows for each of the three
years in the period ended December 31, 2008 and our report dated April 1,
2009 expressed an unqualified opinion thereon.

|                 |                                 
|---------------- | --------------------------------
|
|
|
|
|Tel-Aviv, Israel | KOST FORER GABBAY & KASIERER    
|April 1, 2009    | A Member of Ernst & Young Global

F - 3

---

---

|CERAGON NETWORKS LTD. AND SUBSIDIARIES
|--------------------------------------
|                                      
|CONSOLIDATED BALANCE SHEETS           
|                                      
|U.S. dollars in thousands             

|                                                                     |  | December 31,
|-------------------------------------------------------------------- |  | ------------
|
|
|
|
|ASSETS                                                               |  |             
|                                                                     |  |             
|CURRENT ASSETS:                                                      |  |             
|Cash and cash equivalents                                            |  |             
|Short-term bank deposits                                             |  |             
|Short-term marketable securities                                     |  |             
|Trade receivables (net of allowance for doubtful accounts of $ 1,279 |  |             
|and $ 2,517 at December 31, 2007 and 2008, respectively)             |  |             
|Other accounts receivable and prepaid expenses                       |  |             
|Deferred tax asset                                                   |  |             
|Inventories                                                          |  |             
|                                                                     |  |             
|                                                                     |  |             
|Total current assets                                                 |  |             
|                                                                     |  |             
|                                                                     |  |             
|LONG-TERM ASSETS:                                                    |  |             
|Long-term bank deposits                                              |  |             
|Long-term marketable securities                                      |  |             
|Severance pay fund                                                   |  |             
|Long term deferred tax asset                                         |  |             
|                                                                     |  |             
|                                                                     |  |             
|Total long-term assets                                               |  |             
|                                                                     |  |             
|                                                                     |  |             
|PROPERTY AND EQUIPMENT, NET                                          |  |             
|                                                                     |  |             
|                                                                     |  |             
|Total assets                                                         |  |             
|                                                                     |  |             

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

F - 4

---

---

|CERAGON NETWORKS LTD. AND SUBSIDIARIES                     
|-----------------------------------------------------------
|                                                           
|CONSOLIDATED BALANCE SHEETS                                
|                                                           
|U.S. dollars in thousands (except share and per share data)

|                                                                   |  | December 31,
|------------------------------------------------------------------ |  | ------------
|
|
|
|
|LIABILITIES AND SHAREHOLDERS' EQUITY                               |  |             
|                                                                   |  |             
|CURRENT LIABILITIES:                                               |  |             
|Trade payables                                                     |  |             
|Deferred revenues                                                  |  |             
|Other accounts payable and accrued expenses                        |  |             
|                                                                   |  |             
|                                                                   |  |             
|Total current liabilities                                          |  |             
|                                                                   |  |             
|                                                                   |  |             
|LONG TERM LIABILITIES:                                             |  |             
|Accrued severance pay                                              |  |             
|Other payables                                                     |  |             
|                                                                   |  |             
|                                                                   |  |             
|Total long-term liabilities                                        |  |             
|                                                                   |  |             
|                                                                   |  |             
|COMMITMENTS AND CONTINGENT LIABILITIES                             |  |             
|                                                                   |  |             
|SHAREHOLDERS' EQUITY:                                              |  |             
|Share capital -                                                    |  |             
|Ordinary shares of NIS 0.01 par value -                            |  |             
|Authorized: 60,000,000 shares at December 31, 2007 and 2008;       |  |             
|Issued: 36,918,196 and 37,086,504 shares at December 31, 2007      |  |             
|and 2008, respectively; Outstanding: 36,918,196 and 35,586,701     |  |             
|and shares at December 31, 2007 and 2008, respectively.            |  |             
|Additional paid-in capital                                         |  |             
|Treasury shares at cost - 1,499,803 ordinary shares as of December |  |             
|31, 2008                                                           |  |             
|Accumulated other comprehensive income, net of taxes               |  |             
|Accumulated deficit                                                |  |             
|                                                                   |  |             
|                                                                   |  |             
|Total shareholders' equity                                         |  |             
|                                                                   |  |             
|                                                                   |  |             
|Total liabilities and shareholders' equity                         |  |             
|                                                                   |  |             

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

|April 1, 2009                               |  | 
|------------------------------------------- |  | 
|                                            |  | 
|Date of approval of thefinancial statements |  | 

F - 5

---

---

|CERAGON NETWORKS LTD. AND SUBSIDIARIES           
|-------------------------------------------------
|                                                 
|CONSOLIDATED STATEMENTS OF OPERATIONS            
|                                                 
|U.S. dollars in thousands (except per share data)

|                                         |  | Year ended December 31,
|---------------------------------------- |  | -----------------------
|
|
|
|
|Revenues                                 |  |                        
|Cost of revenues                         |  |                        
|                                         |  |                        
|                                         |  |                        
|Gross profit                             |  |                        
|                                         |  |                        
|                                         |  |                        
|Operating expenses:                      |  |                        
|Research and development                 |  |                        
|Less - grants and participations         |  |                        
|                                         |  |                        
|                                         |  |                        
|Research and development, net            |  |                        
|Selling and marketing                    |  |                        
|General and administrative               |  |                        
|Expense in respect of settlement reserve |  |                        
|                                         |  |                        
|                                         |  |                        
|Total operating expenses                 |  |                        
|                                         |  |                        
|                                         |  |                        
|Operating income (loss)                  |  |                        
|Financial income, net                    |  |                        
|                                         |  |                        
|                                         |  |                        
|Income (loss) before taxes               |  |                        
|                                         |  |                        
|Tax benefit                              |  |                        
|                                         |  |                        
|                                         |  |                        
|Net income (loss)                        |  |                        
|                                         |  |                        
|                                         |  |                        
|Net earnings (loss) per share:           |  |                        
|                                         |  |                        
|Basic net earnings (loss) per share      |  |                        
|                                         |  |                        
|                                         |  |                        
|Diluted net earnings (loss) per share    |  |                        
|                                         |  |                        

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

F - 6

---

---

|CERAGON NETWORKS LTD. AND SUBSIDIARIES                     
|-----------------------------------------------------------
|                                                           
|STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY              
|                                                           
|U.S. dollars in thousands (except share and per share data)

|                                              | Ordinary
shares | Share
capital | Additional
paid-in
capital | Treasury
shares
at cost | Deferred
stock
compensation | Accumulated
other
comprehensive
income
(loss) | Accumulated
deficit | Total other
comprehensive
income
(loss) | Total
shareholders'
equity
|--------------------------------------------- | --------------- | ------------- | -------------------------- | ----------------------- | --------------------------- | --------------------------------------------- | ------------------- | --------------------------------------- | --------------------------
|
|
|
|
|Balance as of January 1, 2006                 |                 |               |                            | 26,335,003              |                             | $                                             | 65                  |                                         | $                         
|                                              |                 |              
|Exercise of stock options                     |                 |               |                            | 1,101,087               |                             |                                               | 3                   |                                         |                           
|Reversal of deferred stock compensation upon  |                 |              
|adoption of SFAS 123(R)                       |                 |               |                            | -                       |                             |                                               | -                   |                                         |                           
|Stock-based compensation expense              |                 |               |                            | -                       |                             |                                               | -                   |                                         |                           
|                                              |                 |              
|Income tax benefit derived from exercise of   |                 |               |                            |                         |                            
|employee stock options *)                     |                 |               |                            | -                       |                             |                                               | -                   |                                         |                           
|Comprehensive loss:                           |                 |              
|Unrealized gain from hedging activities       |                 |               |                            | -                       |                             |                                               | -                   |                                         |                           
|Net loss                                      |                 |               |                            | -                       |                             |                                               | -                   |                                         |                           
|                                              |                 |               |                            |                         |                             |                                               |                     |                                         |                           
|Total comprehensive loss                      |                 |               |                            |                         |                             |                                               |                     |                                         |                           
|                                              |                 |               |                            |                         |                             |                                               |                     |                                         |                           
|Balance as of December 31, 2006               |                 |               |                            | 27,436,090              |                             |                                               | 68                  |                                         |                           
|                                              |                 |              
|Issuance of shares,  net of issuance expenses |                 |               |                            | 6,990,000               |                             |                                               | 18                  |                                         |                           
|Exercise of stock options                     |                 |               |                            | 2,492,106               |                             |                                               | 5                   |                                         |                           
|Stock-based compensation expense              |                 |               |                            | -                       |                             |                                               | -                   |                                         |                           
|                                              |                 |              
|Income tax benefit derived from exercise of   |                 |              
|employee stock options *)                     |                 |               |                            | -                       |                             |                                               | -                   |                                         |                           
|Comprehensive income:                         |                 |              
|Unrealized gain from hedging activities       |                 |               |                            | -                       |                             |                                               | -                   |                                         |                           
|Net income                                    |                 |               |                            | -                       |                             |                                               | -                   |                                         |                           
|                                              |                 |               |                            |                         |                             |                                               |                     |                                         |                           
|Total comprehensive income                    |                 |               |                            |                         |                             |                                               |                     |                                         |                           
|                                              |                 |               |                            |                         |                             |                                               |                     |                                         |                           
|Balance as of December 31, 2007               |                 |               |                            | 36,918,196              |                             |                                               | 91                  |                                         |                           
|                                              |                 |              
|Income tax benefit derived from deductible    |                 |              
|issuance expenses                             |                 |               |                            | -                       |                             |                                               | -                   |                                         |                           
|Exercise of stock options                     |                 |               |                            | 168,308                 |                             |                                               | **) -               |                                         |                           
|                                              |                 |              
|Purchase of treasury shares at cost           |                 |               |                            | (1,499,803              | )                           |                                               | -                   |                                         |                           
|Stock-based compensation expense              |                 |               |                            | -                       |                             |                                               | -                   |                                         |                           
|                                              |                 |              
|Income tax benefit derived from exercise of   |                 |              
|employee stock options *)                     |                 |               |                            | -                       |                             |                                               | -                   |                                         |                           
|Comprehensive income:                         |                 |              
|Unrealized loss from hedging activities, net  |                 |              
|of taxes                                      |                 |               |                            |                         |                             |                                               | -                   |                                         |                           
|Net income                                    |                 |               |                            | -                       |                             |                                               | -                   |                                         |                           
|                                              |                 |               |                            |                         |                             |                                               |                     |                                         |                           
|Total comprehensive income                    |                 |               |                            |                         |                             |                                               |                     |                                         |                           
|                                              |                 |               |                            |                         |                             |                                               |                     |                                         |                           
|Balance as of December 31, 2008               |                 |               |                            | 35,586,701              |                             | $                                             | 91                  |                                         | $                         
|                                              |                 |               |                            |                         |                             |                                               |                     |                                         |                           

|*) | The income tax benefit for the years ended December 31, 2006, 2007 and 2008 was
          $ 524, $ 1,673 and $ 249, respectively, for which a valuation allowance was
          provided (see also Note 10f).
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|**) | Represent an amount lower than $1
|--- | ---------------------------------

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

F - 7

---

---

|CERAGON NETWORKS LTD. AND SUBSIDIARIES
|--------------------------------------
|                                      
|CONSOLIDATED STATEMENTS OF CASH FLOWS 
|                                      
|U.S. dollars in thousands             

|                                                                   | Year ended December 31,
|------------------------------------------------------------------ | -----------------------
|
|
|
|
|Cash flows from operating activities:                              |                        
|Net income (loss)                                                  |                        
|Adjustments required to reconcile net income (loss) to net cash    |                        
|used in operating activities:                                      |                        
|Depreciation                                                       |                        
|Stock-based compensation expense                                   |                        
|Gain from sale of property and equipment                           |                        
|Accrued severance pay, net                                         |                        
|Increase in accrued interest on bank deposits                      |                        
|Accrued interest and amortization of premium on held-to-maturity   |                        
|marketable securities                                              |                        
|Increase in trade receivables, net                                 |                        
|Increase in other accounts receivable and prepaid expenses         |                        
|Increase  in inventories, net                                      |                        
|Increase in trade payables                                         |                        
|Increase (decrease) in deferred revenues                           |                        
|Increase in deferred tax asset                                     |                        
|Increase (decrease) in other accounts payable and accrued expenses |                        
|Increase (decrease) in other long-term payables                    |                        
|                                                                   |                        
|                                                                   |                        
|Net cash used in operating activities                              |                        
|                                                                   |                        
|                                                                   |                        
|Cash flows from investing activities:                              |                        
|Purchase of property and equipment                                 |                        
|Proceeds from sale of property and equipment                       |                        
|Investment in short and long-term bank deposits                    |                        
|Proceeds from maturities of short and long-term bank deposits      |                        
|Investment in held-to-maturity marketable securities               |                        
|Proceeds from maturities of held-to-maturity marketable securities |                        
|                                                                   |                        
|                                                                   |                        
|Net cash provided by (used in) investing activities                |                        
|                                                                   |                        
|                                                                   |                        
|Cash flows from financing activities:                              |                        
|Proceeds from issuance of shares, net of issuance costs            |                        
|Purchase of treasury shares at cost                                |                        
|Payment of issuance costs                                          |                        
|Proceeds from exercise of stock options                            |                        
|                                                                   |                        
|                                                                   |                        
|Net cash provided by (used in) financing activities                |                        
|                                                                   |                        
|                                                                   |                        
|Increase (decrease) in cash and cash equivalents                   |                        
|Cash and cash equivalents at the beginning of the year             |                        
|                                                                   |                        
|                                                                   |                        
|Cash and cash equivalents at the end of the year                   |                        
|                                                                   |                        
|                                                                   |                        
|Supplemental disclosures of non cash financing and investing       |                        
|activities:                                                        |                        
|Issuance costs                                                     |                        
|                                                                   |                        
|                                                                   |                        
|Purchase of property and equipment                                 |                        
|                                                                   |                        
|                                                                   |                        
|Unrealized gain (loss) from hedging activities, net                |                        
|                                                                   |                        
|                                                                   |                        
|Deferred taxes due to deductible issuance costs                    |                        
|                                                                   |                        
|                                                                   |                        
|Supplemental disclosure of cash flow information:                  |                        
|Cash paid during the year for income taxes                         |                        
|                                                                   |                        
|Cash paid during the year for interest                             |                        
|                                                                   |                        

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

F - 8

---

---

|CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|NOTE 1: |  | GENERAL
|------- | - | -------

| | Ceragon
Networks Ltd. (the Company) is a leading provider of high capacity, LTE-Ready
wireless backhaul solutions that enable wired and wireless service providers to deliver
voice and premium data services, such as Internet browsing, music and video applications.
The Companys wireless backhaul solutions use microwave technology to transfer large
amounts of network traffic between base stations and the infrastructure at the core of
the mobile network.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company sells its products through a direct sales force, systems integrators,
distributors and original equipment manufacturers.
| | ------------------------------------------------------------------------------------------------------------------------------------

| | The
Company has eleven wholly-owned subsidiaries in Brazil, France, Hong Kong, Singapore,
Nigeria, India, Mexico, the Philippines, the United Kingdom, Australia and the United
States. The subsidiaries provide marketing, distribution, sales and technical support to
the Companys customers worldwide.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
to principal markets and major customers, see Note 11.
| | ---------------------------------------------------------

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES
|------- | - | -------------------------------

| | a. | Basis
of presentation:
| | -- | ----------------------

| | The
consolidated financial statements have been prepared in accordance with accounting
principles generally accepted in the U.S. (U.S. GAAP).
| | -----------------------------------------------------------------------------------------------------------------------------------------------

| | b. | 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Financial
statements in U.S. dollars:
| | -- | -------------------------------------

| | A
majority of the revenues of the Company and certain of its subsidiaries are generated in
U.S. dollars (dollars). In addition, a substantial portion of the Companys
and certain of its subsidiaries costs is incurred in dollars. Since management
believes that the dollar is the currency of the primary economic environment in which the
Company and its subsidiaries operate, the dollar is its functional and reporting
currency. Accordingly, amounts in currencies other than U.S dollars have been remeasured
in accordance with Statement 52 of the Financial Accounting Standards Board (FASB),
Foreign Currency Translation as follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Monetary
balances  at the exchange rate in effect on the balance sheet date.
| | -----------------------------------------------------------------------------

| | Costs
 at the exchange rates in effect as of the date of recognition of the transaction.
| | -----------------------------------------------------------------------------------------

| | All
exchange gains and losses from the remeasurement mentioned above are reflected in the
statement of operations in financial income, net.
| | -------------------------------------------------------------------------------------------------------------------------------------------

F - 9

---

---

|CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | Management
considers the non-U.S. subsidiaries to be a direct, integral extension of the parent
companys operations. Accordingly, the functional currency of these subsidiaries is
the dollar.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | Principles
of consolidation:
| | -- | ----------------------------

| | The
consolidated financial statements include the accounts of the Company and its
subsidiaries (the Group). Intercompany balances and transactions including
profits from intercompany sales not yet realized outside the Group, have been eliminated
upon consolidation.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e. | Cash
equivalents:
| | -- | -----------------

| | Cash
equivalents include short-term, highly liquid investments that are readily convertible to
cash with original maturities of three months or less.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------

| | f. | Short-term
and long-term bank deposits:
| | -- | ---------------------------------------

| | Short-term
bank deposits are deposits with maturities of more than three months and up to one year.
The short-term bank deposits are in U.S. dollars and bear interest at an average rate of
3.24%. The short-term bank deposits are presented at their cost, including accrued
interest.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Long-term
bank deposits are deposits with maturities of more than one year. The long-term deposits
are in U.S. dollars and bear interest at an average rate of 3.90%. The long-term bank
deposits are presented at their cost, including accrued interest.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | g. | Marketable
securities:
| | -- | ----------------------

| | TheCompany
accounts for investments in marketable securities in accordance with SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities(SFAS 115).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Management
determines the appropriate classification of its investments in marketable debt
securities at the time of purchase and reevaluates such determinations at each balance
sheet date. Marketable securities are classified as held-to-maturity as the Company has
the positive intent and ability to hold the securities to maturity. Such marketable
securities are stated at amortized cost plus accrued interest.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the years ended December 31, 2007 and 2008, all securities were accounted for in
accordance with SFAS 115 and were designated by the Companys management as
held-to-maturity.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Amortization
of premium and accretion of discounts, as well as interest, are included in financial
income, net.
| | ---------------------------------------------------------------------------------------------------------------

F - 10

---

---

|CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | The
Company periodically reviews its marketable securities for impairment. If the Company
concludes that any of these investments are impaired, the Company determines whether such
impairment is other-than-temporary as defined under the FASB Staff Position
(FSP) 115-1 The Meaning of Other-Than-Temporary Impairment andIts
Application to Certain Investments. Factors considered to make such a
determination include intent and ability to hold the investment for a period of time
sufficient for any anticipated recovery in market value, the length of time and extent to
which the fair value has been less than its cost basis, the credit ratings of the
securities, the nature of underlying collateral as applicable and the financial condition
and near-term prospects of the issuer. If any impairment is considered other-than-temporary, The
Company will write down the asset to its fair value and take a corresponding charge to
the consolidated statements of operations. During 2006, 2007 and 2008 no
other-than-temporary impairments were identified.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | h. | Inventories:
| | -- | ------------

| | Inventories
are stated at the lower of cost or market value. Inventory provisions are provided to
cover risks arising from excess and slow-moving items, technological obsolescence.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Cost
is determined for all types of inventory using the moving average cost method plus
indirect costs.
| | -------------------------------------------------------------------------------------------------------

| | i. | Property
and equipment:
| | -- | -----------------------

| | Property
and equipment are stated at cost, net of accumulated depreciation. Depreciation is
calculated by the straight-line method over the estimated useful lives of the assets, at
the following annual rates:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                   | %                                    
| | ------------------------------------------------- | -------------------------------------
|
|
|
|
| | Computers, manufacturing and peripheral equipment | 15 - 33                              
| | Office furniture and equipment                    | 7                                    
| | Leasehold improvements                            | Over the shorter of the term of      
| |                                                   | the lease or useful life of the asset

| | j. | Impairment
of long-lived assets:
| | -- | --------------------------------

| | The
Companys and its subsidiaries long-lived assets are reviewed for impairment
in accordance with Statement of Financial Accounting Standard No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets (SFAS 144),
whenever events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to the future undiscounted cash flows
expected to be generated by the asset. If an asset is considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying amount of the
asset exceeds its fair value. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell. During 2006, 2007 and 2008, no
impairment losses have been identified.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 11

---

---

|CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | k. | Income
taxes:
| | -- | -------------

| | The
Company and its subsidiaries account for income taxes in accordance with Statement of
Financial Accounting Standard No. 109, Accounting for Income Taxes (SFAS
No. 109). This Statement prescribes the use of the liability method whereby
deferred tax asset and liability account balances are determined based on differences
between the financial reporting and tax bases of assets and liabilities and for
carryforward losses deferred taxes are measured using the enacted tax rates and laws that
will be in effect when the differences are expected to reverse. The Company and its
subsidiaries provide a valuation allowance, if necessary, to reduce deferred tax assets
to their estimated realizable value if it is more likely than not that some portion or
all of the deferred tax asset will not be realized.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
January 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 (FIN 48).
FIN 48 contains a two-step approach to recognizing and measuring uncertain tax
positions accounted for in accordance with SFAS No. 109. The first step is to evaluate
the tax position taken or expected to be taken in a tax return by determining if the
weight of available evidence indicates that it is more likely than not that, on an
evaluation of the technical merits, the tax position will be sustained on audit,
including resolution of any related appeals or litigation processes. The second step is
to measure the tax benefit as the largest amount that is more than 50% likely to be
realized upon ultimate settlement. The Company elected to classify interest expenses and
penalties recognized in the financial statements as income taxes. For the years 2007 and
2008 no penalties were recognized.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | l. | Revenue
recognition:
| | -- | --------------------

| | The
Company and its subsidiaries generate revenues from selling products to end users,
distributors, system integrators and original equipment manufacturers (OEM).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Revenues
from product sales are recognized in accordance with SEC Staff Accounting Bulletin (SAB)
No. 104, Revenue Recognition (SAB 104), when delivery has
occurred, persuasive evidence of an arrangement exists, the vendors fee is fixed or
determinable, no future obligation exists and collectibility is probable.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company generally does not grant a right of return to its customers. When a right of
return exists, the Company creates a provision for returns according to SFAS 48, Revenue
Recognition When Right of Return Exists.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | When
sale arrangements include a customer acceptance provision, revenue is recognized when the
Company has demonstrated that the criteria specified in the acceptance provision have
been satisfied.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Revenue
from certain arrangements includes multiple elements which are the sale of products and
post delivery installation services that are not essential to the functionality of the
equipment. The Companys accounting policy complies with the requirements set forth
in Emerging Issues Task Force (EITF) Issue No. 00-21, Revenue
Arrangements with Multiple Deliverables (EITF 00-21), relating to the
separation of multiple deliverables into individual accounting units and revenue from
such deliverables is recognized under SAB 104.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 12

---

---

|CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | In
arrangements which include multiple elements, the Company considers the sale of equipment
and its installation to be two separate units of accounting in the arrangement, since the
installation is not essential to the functionality of the equipment, the equipment has
value to the customer on a standalone basis, and fair value of the installation services
exists. In such arrangement, revenues from the sale of equipments are recognized upon
delivery, if all other revenue recognition criteria are met and the Company defers the
fair value of the installation service (but not less than the amount contingent upon
completion of installation, if any) to the period in which such installation occurs.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | To
assess the probability of collection for revenue recognition purposes, the Company
analyzes historical collection experience, current economic trends and the financial
position of its customers. On the basis of these criteria, the Company decides whether
revenue recognition should be deferred and recognized on a cash basis.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company also applies Emerging Issues Task Force (EITF) 99-19, Reporting
Revenues Gross as a Principal versus Net as an Agent (EITF 99-19),
regarding arrangements where the Company also provides third party equipment and reports
revenues gross as a principal.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Deferred
revenues include amounts received from customers for which revenue has not been
recognized.
| | ----------------------------------------------------------------------------------------------------

| | m. | Research
and development costs:
| | -- | -------------------------------

| | Research
and development costs, net of grants received, are charged to the statement of operations
as incurred.
| | ---------------------------------------------------------------------------------------------------------------

| | n. | Royalty-bearing
grants:
| | -- | -----------------------

| | Royalty-bearing
grants from the Government of Israel for funding approved research and development
projects are recognized at the time the Company was entitled to such grants, on the basis
of the costs incurred and included as a reduction in research and development costs. Such
grants were recorded as a reduction in research and development costs since when received
it was not probable that the grants will be repaid (see also Notes 7 and 8a).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o. | Derivative
instruments:
| | -- | -----------------------

| | The
Company has instituted a foreign currency cash flow hedging program using foreign
currency forward and option contracts (derivative instruments) in order to
hedge the exposure to variability in expected future cash flows resulting from changes in
related foreign currency exchange rates. These transactions are designated as cash flow
hedges, as defined by SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities (SFAS 133).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | SFAS
133 requires companies to recognize all of their derivative instruments as either assets
or liabilities in the statement of financial position at fair value. The Company measured
the fair value of the contracts in accordance with SFAS 157, Fair Value
Measurements (SFAS 157) at level 2 (see also Note 2t). The accounting for
changes in the fair value (i.e., gains or losses) of a derivative instrument depends on
whether it has been designated and qualifies as part of a hedging relationship and
further, on the type of hedging relationship.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 13

---

---

|CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | For
those derivative instruments that are designated and qualify as hedging instruments, a
company must designate the hedging instrument, based upon the exposure being hedged, as a
fair value hedge, cash flow hedge or a hedge of a net investment in a foreign operation.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
derivative instruments that are designated and qualify as a cash flow hedge (i.e.,
hedging the exposure to variability in expected future cash flows that is attributable to
a particular risk), the effective portion of the gain or loss on the derivative
instrument is reported as a component of other comprehensive income (loss), net of taxes
and reclassified into earnings in the same period or periods during which the hedged
transaction affects earnings. The effective portion of the derivatives change in
fair value is recognized in earnings.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys cash flow hedging strategy is to hedge against the risk of overall changes
in cash flows resulting from forecasted foreign currency salary payments during the year.
The Company hedges portions of its forecasted expenses denominated in NIS with forward
exchange contracts and options. These forward exchange contracts and options are designated as cash flow hedges,
as defined by SFAS No. 133 and Derivative Implementation Group No. G20, Cash Flow
Hedges: Assessing and Measuring the Effectiveness of a Purchased option Used in a Cash
Flow Hedge (DIG 20) and are all effective.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Fair
value hedging strategy  The Company enters into forward exchange contracts  to hedge a portion of its certain monetary items in the balance sheet,
such as trade receivables and trade payables denominated in foreign currencies for a
period of up to three months. The purpose of the Companys foreign currency hedging
activities is to protect the fair value due to foreign exchange rates.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company recognized net gain from derivative instruments of $ 188, $ 840 and $ 1,440
during the years ended December 31, 2006, 2007 and 2008, respectively. The amounts of $
264, $ 375 and $ 779 were offset against operating expenses during the years ended
December 31, 2006, 2007 and 2008, respectively, and amounts of $ (76), $ 465 and $ 661
were included in financial income , net during the years ended December 31, 2006, 2007
and 2008, respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
balance in accumulated other comprehensive income related to derivative instruments as of
December 31, 2008 is expected to be recognized in the statement of operations over the
next twelve months.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | p. | Concentrations
of credit risk:
| | -- | ------------------------------

| | Financial
instruments that potentially subject the Company and its subsidiaries to concentrations
of credit risk consist principally of cash and cash equivalents, short-term and long-term
bank deposits, marketable securities and trade receivables.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
majority of the Companys cash and cash equivalents and short-term and long-term
bank deposits are invested in U.S. dollar instruments with major banks worldwide. Such
cash and cash equivalents and deposits in the United States may be in excess of insured
limits and are not insured in other jurisdictions. Generally, these cash and cash
equivalents and deposits may be redeemed upon demand and, therefore, bear minimal risk.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 14

---

---

|CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | The
Companys marketable securities include securities issued by U.S government and
agencies and debentures of corporations. The Companys investment policy, approved
by the Investment Committee, limits the amount the Company may invest in any one type of
investment or issuer, thereby reducing credit risk concentrations.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys trade receivables are derived from sales to customers located in North
America, Europe, the Middle East, Africa, Asia-Pacific and Latin America. The Company and
its subsidiaries generally do not require collateral; however, in certain circumstances,
the Company and its subsidiaries may require letters of credit, additional guarantees or
advance payments. The Company and its subsidiaries perform ongoing credit evaluations of
their customers and insure certain trade receivables under credit insurance policies. An
allowance for doubtful accounts is determined with respect to a general reserve and
specific receivables, of which the collection may be doubtful. The Company charges off
receivables when they are deemed uncollectible.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Changes
in the Companys allowance for doubtful accounts are as follows:
| | ------------------------------------------------------------------------

| |                                 | Allowance for
doubtful
Accounts
| | ------------------------------- | -------------------------------
|
|
|
|
| | Balance as of January 1, 2006   |                                
| | Provision                       |                                
| | Write-off                       |                                
| |                                 |                                
| |                                 |                                
| | Balance as of December 31, 2006 |                                
| | Provision                       |                                
| |                                 |                                
| |                                 |                                
| | Balance as of December 31, 2007 |                                
| | Provision                       |                                
| |                                 |                                
| |                                 |                                
| | Balance as of December 31, 2008 |                                
| |                                 |                                

| | q. | Transfers
of Financial Assets
| | -- | -----------------------------

| | During
the year ended December 31, 2008 the Company entered into a transaction for the sale of
 a letter of credit received from a customer of the Company to a foreign financial institution (control and
risk were fully transferred) in a total amount of $ 2,795 and accounted for those
transactions according to SFAS No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities (SFAS 140).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 15

---

---

|CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | r. | Accounting
for stock-based compensation:
| | -- | ----------------------------------------

| | On
January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), Share-Based
Payment (SFAS No. 123(R)) which requires the measurement and
recognition of compensation expense based on estimated fair values for all share-based
payment awards made to employees and directors. SFAS No. 123(R) supersedes Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB
No. 25), for periods beginning in fiscal year 2006. In March 2005, the Securities
and Exchange Commission issued Staff Accounting Bulletin No. 107 (SAB 107)
relating to SFAS No. 123(R). The Company has applied the provisions of SAB 107 in its
adoption of SFAS No. 123(R).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Effective
January 1, 2006, the Company adopted SFAS No. 123(R) using the modified prospective
transition method. Under that transition method, compensation cost recognized in the
years ended December 31, 2006, 2007 and 2008, includes: (a) compensation cost for all
share-based payments granted prior to, but not yet vested as of January 1, 2006, based on
the grant date fair value estimated in accordance with the original provisions of SFAS
No. 123, and (b) compensation cost for all share-based payments granted subsequent to
January 1, 2006, based on the grant-date fair value estimated in accordance with the
provisions of SFAS No. 123(R). Results for prior periods have not been restated, in
accordance with the modified prospective transition method.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | SFAS
No. 123(R) requires companies to estimate the fair value of equity-based payment awards
on the date of grant using an option-pricing model. The value of the portion of the award
that is ultimately expected to vest is recognized as an expense over the requisite
service periods in the Companys consolidated statements of operations.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company estimates the fair value of stock options granted under SFAS No. 123R using the
binomial model with the following weighted-average assumptions for 2006, 2007 and 2008:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                         | December 31,
| | ----------------------- | ------------
|
|
|
|
| | Dividend yield          |             
| | Volatility              |             
| | Risk free interest      |             
| | Early exercise multiple |             

| | Risk-free
interest rates are based on the yield from U.S. Treasury zero-coupon bonds with a term
equivalent to the contractual life of the options; volatility of price of the Companys
shares based upon actual historical stock price movements. Early exercise multiple is
based on actual historical exercise activity. The expected term of the options granted is
derived from output of the option valuation model and represents the period of time that
options granted are expected to be outstanding.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company recognizes compensation expense using the accelerated method for all awards
ultimately expected to vest. Estimated forfeitures are based on historical pre-vesting
forfeitures and on managements estimates. SFAS 123(R) requires forfeitures to be
estimated and revised, if necessary, in subsequent periods if actual forfeitures differ
from those estimates.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 16

---

---

|CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | s. | Severance
pay:
| | -- | --------------

| | The
Companys severance pay liability for its Israeli employees is calculated pursuant
to Israels Severance Pay Law based on the most recent salary of the employees
multiplied by the number of years of employment, as of the balance sheet date. Employees
are entitled to one months salary for each year of employment or a portion thereof.
The Companys liability for all of its employees in Israel is fully covered by
monthly deposits with pension funds, insurance policies and an accrual. The value of the
funds deposited into pension funds and insurance policies is recorded as an asset  severance
pay fund  in the Companys balance sheet.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
severance pay fund includes the deposited funds and accumulated adjustments to the
Israeli Consumer Price Index up to the balance sheet date. The deposited funds may be
withdrawn only upon the fulfillment of the obligation pursuant to Israels Severance
Pay Law or labor agreements. The value of the deposited funds in insurance policies, is
based on the cash surrendered value of these policies, and includes profits / losses.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Severance
expense for the years ended December 31, 2006, 2007 and 2008, amounted to approximately $
1,281, $ 1,168 and $ 1,760, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------

| | t. | Fair
value of financial instruments:
| | -- | ------------------------------------

| | The
following methods and assumptions were used by the Company and its subsidiaries in
estimating their fair value disclosures for financial instruments:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
carrying amounts of cash and cash equivalents, short-term bank deposits, trade
receivables, other accounts receivable, trade payables and other accounts payable
approximate their fair values due to the short-term maturities of such instruments.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
fair value of the Companys long-term bank deposits is estimated by discounting the
future cash flows using the current interest rates for long-term bank deposit of similar
terms and maturities. The carrying amount of the long-term bank deposit does not
significantly differ from its fair value.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
fair value of marketable securities is based on quoted market prices.
| | -------------------------------------------------------------------------

| | Effective
January 1, 2008, the Company adopted SFAS 157, Fair Value Measurements and,
effective October 10, 2008, adopted FSP No. SFAS 157-3, Determining the
FairValue of a Financial Asset When the Market for That Asset Is Not Active,
except as it applies to the nonfinancial assets and nonfinancial liabilities subject to
FSP 157-2. SFAS 157 clarifies that fair value is an exit price, representing the amount
that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants. As such, fair value is a market-based
measurement that should be determined based on assumptions that market participants would
use in pricing an asset or a liability. As a basis for considering such assumptions, SFAS
157 establishes a three-tier value hierarchy, which prioritizes the inputs used in the
valuation methodologies in measuring fair value:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 17

---

---

|CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | Level 1     | Observable
inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in
active markets.
| | ------------ | ----------------------------------------------------------------------------------------------------------------

| | Level 2     | Include
other inputs that are directly or indirectly observable in the marketplace.
| | ------------ | -----------------------------------------------------------------------------------

| | Level 3     | Unobservable
inputs which are supported by little or no market activity.
| | ------------ | ------------------------------------------------------------------------

| | The
fair value hierarchy also requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | u. | Comprehensive
income (loss):
| | -- | ----------------------------

| | The
Company accounts for comprehensive income (loss) in accordance with SFAS No. 130, Reporting
Comprehensive Income. This statement establishes standards for the reporting and
display of comprehensive income (loss) and its components in a full set of general
purpose financial statements. Comprehensive income (loss) generally represents all
changes in stockholders equity during the period except those resulting from
investments by, or distributions to, stockholders. The Company determined that its items
of other comprehensive income (loss) relates to gain and loss on hedging derivative
instruments.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | v. | Warranty
costs:
| | -- | ---------------

| | The
Company generally offers a standard limited warranty, including parts and labor for
periods of 12 to 36 months for its products. The Company estimates the costs that may be
incurred under its basic limited warranty and records a liability in the amount of such
costs at the time product revenue is recognized. Factors that affect the Companys
warranty liability include the number of installed units, historical and anticipated
rates of warranty claims, and cost per claim. The Company periodically assesses the
adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.
Warranty expenses (income) for the years ended December 31, 2006, 2007 and 2008 were
approximately $ 352, $ 530 and $ (507), respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | w. | Basic
and diluted net earnings (loss) per share:
| | -- | ------------------------------------------------

| | Basic
net earnings (loss) per share is computed based on the weighted average number of
Ordinary shares outstanding during each year. Diluted net earnings (loss) per share is
computed based on the weighted average number of Ordinary shares outstanding during each
year, plus dilutive potential Ordinary shares considered outstanding during the year, in
accordance with Statement of Financial Accounting Standard No. 128, Earnings Per
Share(SFAS 128).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
total weighted average number of shares related to the outstanding options excluded from
the calculations of diluted net earnings (loss) per share due to their anti-dilutive
effect was 3,364,631, 345,014 and 1,213,564 for the years ended December 31, 2006, 2007
and 2008, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | x. | Treasury
shares
| | -- | ---------------

| | The
Company repurchases its Ordinary shares on the open-market and holds such shares as
Treasury shares. The Company presents the cost of repurchased treasury shares as a
reduction of shareholders equity.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 18

---

---

|CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | y. | Reclassification:
| | -- | -----------------

| | Certain
prior period amounts have been reclassified to conform to the current years
presentation.
| | --------------------------------------------------------------------------------------------------

| | z. | Impact
of recently issued Accounting Standards:
| | -- | -----------------------------------------------

| | In
December 2007, the FASB issued SFAS No. 141 (Revised) Business Combinations.
SFAS 141 (Revised) replaces SFAS 141 Business Combination and
establishes principles and requirements for how the acquirer of a business recognizes and
measures in its financial statements the identifiable assets acquired, the liabilities
assumed, and any noncontrolling interest in the acquiree. The statement also provides
guidance for recognizing and measuring the goodwill acquired in the business combination
and determines what information to disclose to enable users of the financial statements
to evaluate the nature and financial effects of the business combination. The guidance
will become effective for the fiscal year beginning after December 15, 2008. The Company
does not expect that SFAS 141 (Revised) will have any impact on the Companys
historical financial statements upon adoption.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
December 2007, the FASB issued SFAS 160, Noncontrolling Interests inConsolidated
Financial Statements. SFAS 160 amends Accounting Research Bulletin 51, Consolidated
Financial Statements, to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It
also clarifies that a noncontrolling interest in a subsidiary is an ownership interest in
the consolidated entity that should be reported as equity in the consolidated financial
statements. SFAS 160 also changes the way the consolidated income statement is presented
by requiring consolidated net income to be reported at amounts that include the amounts
attributable to both the parent and the noncontrolling interest. It also requires
disclosure, on the face of the consolidated statement of income, of the amounts of
consolidated net income attributable to the parent and to the noncontrolling interest.
SFAS 160 requires that a parent recognize a gain or loss in net income when a subsidiary
is deconsolidated and requires expanded disclosures in the consolidated financial
statements that clearly identify and distinguish between the interests of the parent
owners and the interests of the noncontrolling owners of a subsidiary. SFAS 160 is
effective for fiscal periods, and interim periods within those fiscal years, beginning on
or after December 15, 2008. The Company does not expect that SFAS 160 will have any
impact on the Companys historical financial statements upon adoption.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
February 2008, the FASB issued FSP No. FAS 140-3, Accounting for Transfers of
Financial Assets and Repurchase Financing Transactions (FSP 140-3).FSP
140-3 concludes that a transferor and transferee should not separately account for a
transfer of a financial asset and a related repurchase financing unless (a) the two
transactions have a valid and distinct business or economic purpose for being entered
into separately and (b) the repurchase financing does not result in the initial
transferor regaining control over the financial asset. FSP 140-3 is effective for
financial statements issued for fiscal years beginning on or after November 15,
2008, and interim periods within those fiscal years. The adoption of FSP 140-3 is not
expected to have a material effect on the Companys results of operations or
financial position.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 19

---

---

|CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|NOTE 2: |  | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | In
February 2008, the FASB issued FSP No. FAS 157-1, Application of FASB
Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements
That Address Fair Value Measurements for Purposes of Lease Classification or Measurement
under Statement 13", and FSP No. FAS 157-2, Effective Date of FASB
Statement No. 157". Collectively, the Staff Positions defer the effective date
of Statement 157 to fiscal years beginning after November 15, 2008 for nonfinancial
assets and nonfinancial liabilities except for items that are recognized or disclosed at
fair value on a recurring basis at least annually, and amend the scope of Statement 157.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
March 2008, the FASB issued Statement 161 Disclosures about Derivative Instruments
and Hedging Activities (SFAS 161) an amendment to FASB No. 133. This
statement changes the disclosure requirements for derivative instruments and hedging
activities. Entities are required to provide enhanced disclosures about (a) how and why
and entity uses derivative instruments, (b) how derivative instruments and related hedged
items are accounted for under Statement 133 and its related interpretations, and (c) how
derivative instruments and related hedged items affect an entitys financial
position, financial performance, and cash flows. This statement is effective for
financial statements issued for fiscal years and interim periods beginning after November
15, 2008. Early application is encouraged. The Company does not expect the adoption of
SFAS 161 to have a material impact on its financial statements.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally AcceptedAccounting
Principles. SFAS 162 identifies the sources of accounting principles and the
framework for selecting the principles to be used in the preparation of financial
statements of nongovernmental entities that are presented in conformity with generally
accepted accounting principles in the United States. SFAS 162 became effective on
November 2008. The adoption of this statement is not expected to have a material effect
on the Companys financial statements.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 20

---

---

|CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|NOTE 3: |  | MARKETABLE SECURITIES
|------- | - | ---------------------

| | The
following is a summary of held-to-maturity securities:
| | ----------------------------------------------------------

| |                                    | December 31,
| | ---------------------------------- | ------------
|
|
|
|
| | Held-to-maturity:                  |             
| |                                    |             
| | U.S. government and agencies debts |             
| | Corporate debentures               |             
| |                                    |             
| |                                    |             
| |                                    |             
| |                                    |             

| | The
unrealized losses and gains in the Companys investments in held-to-maturity
marketable securities were mainly caused by interest rate changes. The contractual cash
flows of these investments are either guaranteed by the U.S. government or an agency of
the U.S. government or were issued by highly rated corporations and other governments.
Accordingly, it is expected that the securities would not be settled at a price less than
the amortized cost of the Companys investment.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Based
on the ability and intent of the Company to hold these investments until maturity, the
bonds were not considered to be other than temporarily impaired at December 31, 2008.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Out
of the unrealized losses as of December 31, 2007 and 2008, $ 88 and $ 149
respectively, of losses are outstanding over 12 month period. The fair value of these
marketable securities which bear losses over 12 twelve month period is $ 3,613 and
$ 8,490, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Aggregate
maturities of held-to-maturity securities for years subsequent to December 31, 2008 are:
| | --------------------------------------------------------------------------------------------------

| |                                         | Amortized cost | Fair market value
| | --------------------------------------- | -------------- | -----------------
|
|
|
|
| | Held-to-maturity:                       |                |                  
| |                                         |                |                  
| | 2009 (short-term marketable securities) |                |                  
| | 2010                                    |                |                  
| | 2011                                    |                |                  
| |                                         |                |                  
| |                                         |                |                  
| |                                         |                |                  
| |                                         |                |                  

F - 21

---

---

|CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|NOTE 4: |  | OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
|------- | - | ----------------------------------------------

| |                                                    | December 31,
| | -------------------------------------------------- | ------------
|
|
|
|
| | Government authorities                             |             
| | Prepaid expenses                                   |             
| | Receivables related to unrecognized sold inventory |             
| | Other                                              |             
| |                                                    |             
| |                                                    |             
| |                                                    |             
| |                                                    |             

|NOTE 5: |  | INVENTORIES
|------- | - | -----------

| |                   | December 31,
| | ----------------- | ------------
|
|
|
|
| | Raw materials     |             
| | Work in progress  |             
| | Finished products |             
| |                   |             
| |                   |             
| |                   |             
| |                   |             

| | Finished
products include products shipped to customers for which revenues were not recognized
during the year. Such products amounted to $ 10,254 and $ 15,537 at December 31,
2007 and 2008, respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
2006, 2007 and 2008, the Company recorded inventory write-offs for excess inventory and a
provision for slow moving inventory in a total amount of $ 716, $ 2,353 and $ 3,119,
respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 6: |  | PROPERTY AND EQUIPMENT, NET
|------- | - | ---------------------------

| |                                                   | December 31,
| | ------------------------------------------------- | ------------
|
|
|
|
| | Cost:                                             |             
| | Computers, manufacturing and peripheral equipment |             
| | Office furniture and equipment                    |             
| | Leasehold improvements                            |             
| |                                                   |             
| |                                                   |             
| |                                                   |             
| |                                                   |             
| | Accumulated depreciation:                         |             
| | Computers, manufacturing and peripheral equipment |             
| | Office furniture and equipment                    |             
| | Leasehold improvements                            |             
| |                                                   |             
| |                                                   |             
| |                                                   |             
| |                                                   |             
| |                                                   |             
| | Depreciated cost                                  |             
| |                                                   |             

| | Depreciation
expenses for the years ended December 31, 2006, 2007 and 2008 were $ 1,194, $ 1,342 and $
2,070, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------

F - 22

---

---

|CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|NOTE 7: |  | OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
|------- | - | -------------------------------------------

| |                                               | December 31,
| | --------------------------------------------- | ------------
|
|
|
|
| | Employees and payroll accruals                |             
| | Accrued expenses                              |             
| | Royalties to Government authorities (Note 8a) |             
| | Provision for warranty costs                  |             
| | Other                                         |             
| |                                               |             
| |                                               |             
| |                                               |             
| |                                               |             

|NOTE 8: |  | COMMITMENTS AND CONTINGENT LIABILITIES
|------- | - | --------------------------------------

| | a. | Royalties
to the Office of the Chief Scientist:
| | -- | -----------------------------------------------

| | The
Company participated in programs sponsored by the Israeli Government for the support of
research and development activities. Through December 31, 2006, the Company had obtained
grants from the Office of the Chief Scientist of the Israeli Ministry of Industry, Trade
and Labor (the OCS) aggregating to $ 18,542 for certain of the Companys
research and development projects. The Company was obligated to pay royalties to the OCS,
amounting to 3%-3.5% of the sales of the products and other related revenues generated
from such projects, equal to 100% of the grants received, linked to the U.S. dollar and
for grants received after January 1, 1999 also bearing interest at the rate of LIBOR. The
obligation to pay these royalties was contingent on actual sales of the products and in
the absence of such sales, no payment is required.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
December 2006, the Company entered into an agreement with the OCS to conclude its
research and development grant programs sponsored by the OCS. Under the agreement and as
of December 31, 2006, the Company was obligated to repay the OCS approximately $ 11,887.
The payment was agreed to be made in six semiannual installments commencing 2007 through
2009. The outstanding obligation was linked to the change in Israels Consumer Price
Index and bore interest. In addition, the Company was required to continue reporting to
the OCS regarding its sales each quarter until the obligation is fully paid.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the second quarter of 2008 an amount of approximately $ 7,360 was paid to the OCS to
retire the remaining outstanding debt from the arrangement reached with the OCS in
December 2006.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 23

---

---

|CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|NOTE 8: |  | COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
|------- | - | ----------------------------------------------

| | b. | Lease
commitments:
| | -- | ------------------

| | The
Company and its subsidiaries lease their facilities and motor vehicles under various
operating lease agreements that expire on various dates. Aggregate minimum rental
commitments under non-cancelable leases at December 31, 2008, are as follows:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Year ended December 31, | Facilities | Motorvehicles | Total
| | ----------------------- | ---------- | ------------- | -----
|
|
|
|
| | 2009                    |            |               | $    
| | 2010                    |            |               |      
| | 2011                    |            |               |      
| | 2012                    |            |               |      
| | 2013                    |            |               |      
| | 2014 and thereafter     |            |               |      
| |                         |            |               |      
| |                         |            |              
| |                         |            |               | $    
| |                         |            |               |      

| | Expenses
for lease of facilities for the years ended December 31, 2006, 2007 and 2008 were
approximately $ 1,115, $ 1,166 and $ 1,928, respectively (see also Note 13).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Expenses
for the lease of motor vehicles for the years ended December 31, 2006, 2007 and 2008 were
approximately $ 781, $ 905 and $ 1,042, respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Charges
and guarantees:
| | -- | -----------------------

| | As
of December 31, 2008, the Company provided bank guarantees in an aggregate amount of $ 7,121
with respect to tender offer guarantees and performance guarantees to its customers.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | Potential
claim:
| | -- | ----------------

| | 1. | NEC
Corporation, or NEC, has asserted that the Company has been using its
               intellectual property in certain of the Companys products. The
Company                entered into discussions with NEC with respect to NECs
allegation. On                August 8, 2007, in the framework of this discussion, the
Company made a                settlement offer to NEC in order to fully resolve NECs
allegations. This                settlement offer included a lump sum payment of $ 450
and certain                cross-licensing arrangements in consideration for a release of
any potential                claim of infringement relating to NECs allegations.
The Company believes                that it does not infringe any valid claim of NEC
patents at issue, and if any of                these patents were to be tried, a
competent judge or jury would not find the                Company liable to NEC for
patent infringement damages. However, in the light of                the Companys
offer made to NEC a provision of $ 450 is included in the                consolidated
financial statements as of December 31, 2008.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | In
December 2008, the Company received a claim from a certain company stating
               that in its opinion the Company requires a license to one of its patents.
The                Company, based on available information, believes it does not infringe
the                patent at issue. However, the Company is not able to estimate the
outcome of                such claim. Accordingly, no provision was accrued in the
financial statements as                of December 31, 2008.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 24

---

---

|CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|NOTE 9: |  | SHAREHOLDERS EQUITY
|------- | - | --------------------

| | The
Ordinary shares of the Company are traded on Nasdaq Global Market and on the Tel Aviv
Stock Exchange, under the symbol CRNT.
| | ----------------------------------------------------------------------------------------------------------------------------------

| | a. | General:
| | -- | --------

| | The
ordinary shares entitle their holders to receive notice to participate and vote in
general meetings of the Company, the right to share in distributions upon liquidation of
the Company, and to receive dividends, if declared.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Issuance
of shares:
| | -- | -------------------

| | In
November 2007, the Company issued 6,990,000 ordinary shares in a follow-on equity
offering on Nasdaq Global Market. The offering included 6,000,000 ordinary shares issued
to public at price of $ 13.5 per share and additional 990,000 ordinary shares issued to
the underwriters. Total proceeds net of issuance costs of approximately $ 6,101, were $
88,264.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Stock
options plans:
| | -- | --------------------

| | 1. | Under
the Companys 1996 key Employee Share Incentive Plan, the 1997
               Affiliate Employees Stock Option Plan (the Plans), and the
2003                Share Option Plan (the 2003 Plan), options may be granted
to                officers, directors, employees and consultants of the Company or its
               subsidiaries. The options vest primarily over one to five years. The
options                expire ten years from the date of grant.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
light of the adoption of the 2003 Plan, the Company ceased granting options under the
1996 Key Employee Share Incentive Plan as of December 31, 2002 and under the 1997
Affiliate Employee Share Option Plan as of February 2003 although options granted under
the 1996 Key Employee Share Incentive Plan or 1997 Affiliate Share Option Plan before
such dates are still valid, subject to the respective Plans.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Upon
adoption of its share option plans, the Company reserved for issuance
               14,273,188 ordinary shares in accordance with the respective terms
thereof. As                of December 31, 2008, the Company still has 188,482 Ordinary
shares available                for future grant under the plans. Any options, which are
canceled or forfeited                before the expiration date, become available for
future grants.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | During
2008, the Companys board of directors approved a stock option
               exchange program for certain share options that were granted during 2007
and                2008 until the date of the exchange program (the Options).
Under the                exchange program, the Company offered its employees the
opportunity to exchange                the Options, with new options to be granted to
them on the date of the exchange.                These new options would have a new
exercise price which would be equal to the                closing price of the Companys
Ordinary shares on the NASDAQ Global Market                on the date the new options
were granted. As a result of the exchange, on                November 6, 2008, 391,000
options with an exercise price ranging between $ 7 to                17 per share were
cancelled and 391,000 options with an exercise price of $ 5.65                per share
were granted. According to the program, those new options will vest                over a
period of 4 years commencing the date of the exchange.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 25

---

---

|CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|NOTE 9: |  | SHAREHOLDERS EQUITY (Cont.)
|------- | - | ----------------------------

| | The
Company accounted for the exchange of options under the provisions of SFAS 123(R) which
indicates that a modification to the terms of an award should be treated as an exchange
of the original award for a new award with total compensation cost equal to the
grant-date fair value of the original award plus the incremental value of the
modification to the award. Under Statement 123(R), the calculation of the incremental
value is based on the excess of the fair value of the new (modified) award based on
current circumstances over the fair value of the original option measured immediately
before its terms are modified based on current circumstances. As a result of the
modification, the Company will record additional expense in the amount of $ 275 to be
recognized over new requisite service period ending 2012. In the year ended on December
31, 2008, the Company recorded an additional expense of $ 25 with respect to this
exchange. The remaining compensation expense of the original awards shall be expense over
the new vesting period of 4 years.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | The
following is a summary of the Companys stock options granted among the
               various plans:
| | -- | ---------------------------------------------------------------------------------------------------------

| |                                        | Year ended December 31, 2008
| | -------------------------------------- | ----------------------------
|
|
|
|
| | Outstanding at beginning of year       |                             
| | Granted                                |                             
| | Exercised                              |                             
| | Forfeited                              |                             
| |                                        |                             
| |                                        |                             
| | Outstanding at end of the year         |                             
| |                                        |                             
| |                                        |                             
| | Options exercisable at end of the year |                             
| |                                        |                             
| |                                        |                             
| | Vested and expected to vest            |                             
| |                                        |                             

| | *)
          304,000 options from beginning of year balance were repriced.
| | --------------------------------------------------------------------------

| | The
Companys options are generally granted at exercise prices which are equal to the
market value of the Ordinary shares at the grant date. The weighted average grant date
fair values of the options granted during 2006, 2007 and 2008 were $ 1.31, $ 4.02
and $ 4.12 respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
aggregate intrinsic value in the table above represents the total intrinsic value (the
difference between the Companys closing stock price on the last trading day of
fiscal 2008 and the exercise price, multiplied by the number of in-the-money options)
that would have been received by the option holders had all option holders exercised
their options on December 31, 2008. This amount is impacted by the changes, in the fair
market value of the Companys shares. Total intrinsic value of options exercised
during the years ended December 31, 2007 and 2008 were $ 14,910 and $ 693, respectively.
As of December 31, 2008, there was $ 4,068 of total unrecognized compensation cost
related to non-vested share-based compensation arrangements granted under the Companys
stock option plans. That cost is expected to be recognized over a weighted-average period
of one year.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 26

---

---

|CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|NOTE 9: |  | SHAREHOLDERS EQUITY (Cont.)
|------- | - | ----------------------------

| | The
total equity-based compensation expense related to all of the Companys equity-based
awards, recognized for the years ended December 31, 2006, 2007 and 2008, was comprised as
follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                         | Year ended December 31,
| | --------------------------------------- | -----------------------
|
|
|
|
| | Cost of revenues                        |                        
| | Research and development, net           |                        
| | Selling and marketing                   |                        
| | General and administrative              |                        
| |                                         |                        
| |                                         |                        
| | Total stock-based compensation expenses |                        
| |                                         |                        

| | d. | Treasury
shares:
| | -- | ----------------

| | In
October 2008, the Company initiated a share repurchase program, under which, the Company
is authorized to purchase its outstanding Ordinary shares up to aggregate value of
$20,000. The purchases may be performed in the open market or in negotiated or block
transactions, all subject to regulatory requirements. As of December 31, 2008, the
Company had purchased 1,499,803 of its outstanding Ordinary shares, at a weighted average
price per share of $5.28, for the total consideration of approximately $7,923.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e. | Dividends:
| | -- | ----------

| | In
the event that cash dividends are declared in the future, such dividends will be paid in
NIS or in foreign currency subject to any statutory limitations. The Company does not
intend to pay cash dividends in the foreseeable future.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 10: |  | TAXES ON INCOME
|-------- | - | ---------------

| | a. | Tax
benefits under the Law for the Encouragement of Industry (Taxes), 1969:
| | -- | ---------------------------------------------------------------------------

| | The
Company currently qualifies as an industrial company under the above law and,
as such, is entitled to certain tax benefits, mainly accelerated depreciation of
machinery and equipment, and the right to claim public issuance expenses over three
years, as a deduction for tax purposes.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Reduction
in Israeli tax rates:
| | -- | -------------------------------

| | On
July 25, 2005, the Israeli Parliament passed the Law for the Amendment of the Income Tax
Ordinance (No.147 and Temporary Order), 2005 (the Amendment).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------

| | Inter
alia, the Amendment provides for a gradual reduction in the statutory corporate tax rate
in the following manner: 2008  27%, 2009  26% and 2010 and thereafter  25%.
Furthermore, from 2010, upon reduction of the corporate tax rate to 25%, real capital
gains will be subject to tax of 25%.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 27

---

---

|CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|NOTE 10: |  | TAXES ON INCOME (Cont.)
|-------- | - | -----------------------

| | c. | Measurement
of taxable income:
| | -- | ------------------------------

| | The
Company has elected to file its tax return under the Israeli Income Tax Regulations 1986
(Principles Regarding the Management of Books of Account of Foreign Invested Companies
and Certain Partnerships and the Determination of Their Taxable Income). Accordingly,
results of operation in Israel are measured in terms of earnings in U.S. dollar.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | Tax
benefits under the Law for the Encouragement of Capital Investments, 1959           (the
Capital Investment Law):
| | -- | -----------------------------------------------------------------------------------------------------------------------

| | The
Companys production facilities have been granted an Approved Enterprisestatus
under the Capital Investments Law currently under three separate investment programs.
Pursuant to the Capital Investments Law, the Company has elected the alternative
benefits track and has waived Government grants in return for a tax exemption.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company is also a foreign investors company, as defined by the Capital
Investments Law, and, as such, is entitled to a 10-year period of benefits and may be
entitled to reduced tax rates of between 10% to 25% (depending on the percentage of
foreign ownership in each tax year).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
April 1, 2005, an amendment to the Capital Investments Law came into effect (the CIL
Amendment) and has significantly changed the provisions of the Capital Investments
Law. The CIL Amendment limits the scope of enterprises which may be approved by the
Investment Center by setting criteria for the approval of a facility as a Beneficiary
Enterprise, such as provisions generally requiring that at least 25% of the Beneficiary
Enterprises income will be derived from export. Additionally, the CIL Amendment
enacted major changes in the manner in which tax benefits are awarded under the Capital
Investments Law so that companies no longer require Investment Center approval in order
to qualify for tax benefits. However, the Capital Investments Law provides that terms and
benefits included in any letter of approval already granted will remain subject to the
provisions of the law as they were on the date of such approval. Therefore, the Companys
existing Approved Enterprises will generally not be subject to the provisions of the
Amendment.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company has three capital investment programs that have been granted Approved Enterprise
status, under the Capital Investments Law (The Approved Programs) and a
fourth program under Beneficiary Enterprise status pursuant to the CIL Amendment (The
Beneficiary Program). Pursuant to the Beneficiary and Approved programs, the
Company is entitled to a tax benefit period of seven to ten years on income derived from
these programs, as follows: a full income tax exemption for the first two years and a
reduced income tax rate of 10% to 25% for the remaining benefit period. The benefit
period commences in the first year the Company reports taxable income after utilization
of all net operating losses. The period of benefits for all these investment programs has
not yet commenced, since the Company has not yet reported taxable income.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
period of tax benefits, detailed above (except for the first two years in which the
Company is tax exempt), is subject to a limit of 12 years from the commencement of
production, or 14 years from the approval date, whichever is earlier.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 28

---

---

|CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|NOTE 10: |  | TAXES ON INCOME (Cont.)
|-------- | - | -----------------------

| | The
entitlement to the above benefits is subject to the Companys fulfilling the
conditions stipulated by the Encouragement of Investments Law, regulations published
thereunder and the letters of approval for the specific investments in Approved
Enterprises. In the event of failure to comply with these conditions, the benefits
may be cancelled and the Company may be required to refund the amount of the benefits, in
whole or in part, linked to the CPI and including interest.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
the event of a distribution of such tax-exempt income including, among other things, a
cash dividend, the Company will be required to pay tax at the rate of 10% to 25% on the
gross amount of the dividend distributed. In addition, these dividends will be subject to
a 15% withholding tax.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result of the CIL Amendment, among others, tax-exempt income generated under the
provisions of the new law, will subject the Company to taxes upon distribution or
liquidation and the Company may be required to record a deferred tax liability with
respect to such tax-exempt income.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys Board of Directors has determined that it will not distribute any amounts
of its undistributed tax-exempt income as dividend. The Company intends to reinvest its
tax-exempt income and not to distribute such income as a dividend. Accordingly, no
deferred income taxes have been provided on income attributable to the Companys
Approved Programs or Beneficiary Program as the undistributed
tax-exempt income is essentially permanent in duration.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2008, the Company did not generate income under the provisions of the
Capital Investment Law and the CIL Amendment.
| | --------------------------------------------------------------------------------------------------------------------------------------

| | The
Capital Investments Law also grants entitlement to claim accelerated depreciation on
equipment used by the Approved Enterprise or the Beneficiary Enterprise during
the first five tax years during which the equipment is used.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Income
from sources other than the Approved Enterprise and Beneficiary
Enterprise during the benefit period will be subject to the tax at the regular tax
rate.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e. | The
income tax expense (benefit) for the years ended December 31, 2006, 2007 and
          2008 consisted of the following:
| | -- | ---------------------------------------------------------------------------------------------------------------------------

| |                   | Year ended December 31,
| | ----------------- | -----------------------
|
|
|
|
| | Current           |                        
| | Deferred          |                        
| |                   |                        
| |                   |                        
| |                   |                        
| |                   |                        
| |                   |                        
| | Domestic (Israel) |                        
| | Foreign           |                        
| |                   |                        
| |                   |                        
| |                   |                        
| |                   |                        

F - 29

---

---

|CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|NOTE 10: |  | TAXES ON INCOME (Cont.)
|-------- | - | -----------------------

| | f. | Deferred
income taxes:
| | -- | ----------------------

| | Deferred
income taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes. Significant components of the Companys deferred tax assets
and liabilities are as follows:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                          | December 31,
| | -------------------------------------------------------- | ------------
|
|
|
|
| | Deferred tax assets:                                     |             
| | Net operating loss carry forward *)                      |             
| | Temporary differences relating to reserve and allowances |             
| |                                                          |             
| |                                                          |             
| | Net deferred tax asset before valuation allowance        |             
| | Valuation allowance                                      |             
| |                                                          |             
| |                                                          |             
| | Total net deferred tax asset                             |             
| |                                                          |             

| | *) | Including
deferred taxes on losses for Israeli income tax purposes for 2007 and 2008, derived from the exercise of employee stock options                in
the amount of $6,246 and $843, respectively. The benefit derived from the
               exercise of employee stock options was not recorded through additional
paid-in                capital as required under FAS 123(R) since a valuation allowance
was provided in                this respect. As a result, there is no impact on the
Companys                shareholders equity and on the deferred taxes for
each of the years                presented.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
assessing the realization of deferred tax assets, management considers whether it is more
likely than not that all or some portion of the deferred tax assets will not be realized.
The ultimate realization of the deferred tax assets is dependent upon the generation of
future taxable income during the periods in which temporary differences are deductible
and net operating losses are utilized. Based on consideration of these factors, the
Company recorded a valuation allowance amounting $26,912 and $ 10,442 at December 31, 2007
and 2008, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | g. | Net
operating loss carryforward:
| | -- | --------------------------------

| | The Company has accumulated losses for Israeli income tax purposes as of December 31, 2008 in
the amount of approximately $ 45,684. These losses may be carried forward and offset
against taxable income in the future for an indefinite period.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2008, the Companys U.S. subsidiary had a U.S. federal net operating
loss carryforward of approximately $ 9,672 that can be carried forward and offset against
taxable income and that expires during the years 2019 to 2026. Utilization of U.S. net
operating losses may be subject to substantial annual limitations due to the change
in ownership provisions of the Internal Revenue Code of 1986 and similar state law
provisions. The annual limitations may result in the expiration of net operating losses
before utilization.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 30

---

---

|CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|NOTE 10: |  | TAXES ON INCOME (Cont.)
|-------- | - | -----------------------

| | h. | Income
(loss) before taxes is comprised as follows:
| | -- | ---------------------------------------------------

| |          | Year ended December 31,
| | -------- | -----------------------
|
|
|
|
| | Domestic |                        
| | Foreign  |                        
| |          |                        
| |          |                        
| |          |                        
| |          |                        

| | i. | Reconciliation
of the theoretical tax expense to the actual tax expense:
| | -- | ------------------------------------------------------------------------

| | A
reconciliation between the theoretical tax expense, assuming all income is taxed at the
statutory tax rate applicable to income of the Company and the actual tax expense as
reported in the statement of operations, is as follows:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                      | Year ended December 31,
| | ---------------------------------------------------- | -----------------------
|
|
|
|
| | Income (loss) before taxes as reported in the        |                        
| | consolidated statements of operations                |                        
| |                                                      |                        
| |                                                      |                        
| | Statutory tax rate                                   |                        
| |                                                      |                        
| |                                                      |                        
| | Theoretical tax expenses on the above amount at the  |                        
| | Israeli statutory tax rate                           |                        
| | Non-deductible expenses                              |                        
| | Non-deductible expenses related to employee stock    |                        
| | options                                              |                        
| | Deferred taxes on losses (utilization of losses) and |                        
| | temporary differences for which a valuation          |                        
| | allowance was provided                               |                        
| | Other                                                |                        
| |                                                      |                        
| |                                                      |                        
| | Actual tax benefit                                   |                        
| |                                                      |                        

| | j. | Effective
January 1, 2007, the Company adopted the provisions of FIN 48. The                balance
for unrecognized tax benefit for tax positions which are uncertain of
               being sustained at December 31, and 2007 and 2008 is in the amount of $ 0 and $ 141, respectively.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company and its subsidiaries file income tax rerun in Israel, the United States and other
various jurisdictions. The Company and its subsidiaries are routinely examined by various
taxing authorities. The Israeli Tax Authorities are currently assessing income tax
returns of the Company for the tax years 2003 through 2006. There are tax years which
remain subject to examination in various other jurisdictions.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 31

---

---

|CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|NOTE 11: |  | SEGMENTS, CUSTOMERS AND GEOGRAPHIC INFORMATION
|-------- | - | ----------------------------------------------

| | a. | The
Company applies SFAS No. 131, Disclosures about Segments of an           Enterprise
and Related Information (SFAS 131). The Company           operates in
one reportable segment (see Note 1 for a brief description of the           Companys
business). The total revenues are attributed to geographic areas           based on the
location of the end customer.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | The
following presents total revenues for the years ended December 31, 2006,           2007
and 2008 and long-lived assets as of December 31, 2006, 2007 and 2008:
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                   | Year ended December 31,
| | ------------------------------------------------- | -----------------------
|
|
|
|
| | Revenues from sales to unaffiliated customers:    |                        
| |                                                   |                        
| | Asia-Pacific                                      |                        
| | Europe, Middle East and Africa                    |                        
| | North America                                     |                        
| | Latin America                                     |                        
| |                                                   |                        
| |                                                   |                        
| |                                                   |                        
| |                                                   |                        
| | Property and equipment, net, by geographic areas: |                        
| |                                                   |                        
| | Israel                                            |                        
| |                                                   |                        
| | Others                                            |                        
| |                                                   |                        
| |                                                   |                        
| |                                                   |                        
| |                                                   |                        

| | c. | For
the years ended December 31, 2006, 2007 and 2008, one customer accounted for
          approximately 17%, 10% and 24%, respectively, of the Companys revenues
for           that year.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 32

---

---

|CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|NOTE 12: |  | SELECTED STATEMENTS OF OPERATIONS DATA
|-------- | - | --------------------------------------

| | a. | Financial
income, net:
| | -- | ----------------------

| |                                                     | Year ended December 31,
| | --------------------------------------------------- | -----------------------
|
|
|
|
| | Financial income:                                   |                        
| | Interest on marketable securities and bank deposits |                        
| |                                                     |                        
| | Foreign currency translation differences            |                        
| |                                                     |                        
| |                                                     |                        
| |                                                     |                        
| |                                                     |                        
| | Financial expenses:                                 |                        
| | Bank charges                                        |                        
| | Interest in respect of the OCS (see also Note 8a)   |                        
| | Foreign currency translation differences            |                        
| | Other                                               |                        
| |                                                     |                        
| |                                                     |                        
| |                                                     |                        
| |                                                     |                        
| |                                                     |                        
| |                                                     |                        
| |                                                     |                        

| | b. | Net
earnings (loss) per share:
| | -- | ------------------------------

| | The
following table sets forth the computation of basic and diluted net earnings (loss) per
share:
| | --------------------------------------------------------------------------------------------------

| |                                                 | Year ended December 31,
| | ----------------------------------------------- | -----------------------
|
|
|
|
| | Numerator:                                      |                        
| | Numerator for basic and diluted net earnings    |                        
| | (loss) per share - income (loss) available      |                        
| | to shareholders of Ordinary shares              |                        
| |                                                 |                        
| |                                                 |                        
| | Denominator:                                    |                        
| | Denominator for basic net earnings (loss) per   |                        
| | share - weighted average number of shares       |                        
| |                                                 |                        
| |                                                 |                        
| | Effect of dilutive securities:                  |                        
| | Employee stock options                          |                        
| |                                                 |                        
| |                                                 |                        
| | Denominator for diluted net earnings (loss) per |                        
| | share - adjusted weighted average number of     |                        
| | shares                                          |                        
| |                                                 |                        

| | *) | Antidilutive.
| | -- | -------------

F - 33

---

---

|CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
|------------------------------------------
|                                          
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                          
|U.S. dollars in thousands                 

|NOTE 13: |  | RELATED PARTY BALANCES AND TRANSACTIONS
|-------- | - | ---------------------------------------

| | Most
of the related party balances and transactions are with related companies and principal
shareholders.
| | ----------------------------------------------------------------------------------------------------------

| | Yehuda
Zisapel is a principal shareholder of the Company who, as of December 31, 2007 and 2008,
owned 6.0% and 6.3% respectively of the Companys outstanding Ordinary shares. Zohar
Zisapel is the Chairman of the Board of Directors and a principal shareholder of the
Company who, as of December 31, 2007 and 2008, owned 8.4% and 11.5% respectively of the
Companys outstanding Ordinary shares. Yehuda and Zohar Zisapel are brothers who do
not have a voting agreement between them. Jointly or severally, they are also founders,
directors and principal shareholders of several other companies that are known as the
RAD-BYNET group.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Members
of the RAD-BYNET group provide the Company on an as-needed basis with information systems, marketing, and administrative services, and the Company reimburses
each company for its costs in providing these services. The aggregate amount of these
expenses was approximately $ 813, $ 767 and $ 1,170 in 2006, 2007 and 2008, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company leases its offices in Israel from real estate holding companies controlled by
Yehuda and Zohar Zisapel. In June 2008, the Company extended its facility lease agreement
until December 31, 2010. Additionally, the Company leases the U.S. subsidiarys
office space from a real estate holding company controlled by Yehuda and Zohar Zisapel.
The lease for this facility is valid until July 2013. The aggregate amount of rent and
maintenance expenses related to these properties was approximately $ 758 in 2006, $ 778
in 2007 and $ 1,403 in 2008.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company purchases certain inventory components from members of the RAD-BYNET group,
which are integrated into its products. The aggregate purchase price of these components
was approximately $ 3,009, $ 3,389 and $ 4,338 for the years ended December 31, 2006,
2007 and 2008, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Transactions
with related parties:
| | ----------------------------------

| |                                     | Year ended December 31,
| | ----------------------------------- | -----------------------
|
|
|
|
| | Cost of revenues                    |                        
| |                                     |                        
| |                                     |                        
| | Research and development expenses   |                        
| |                                     |                        
| |                                     |                        
| | Selling and marketing expenses      |                        
| |                                     |                        
| |                                     |                        
| | General and administrative expenses |                        
| |                                     |                        

| | Balances
with related parties:
| | ------------------------------

| |                                                             | December 31,
| | ----------------------------------------------------------- | ------------
|
|
|
|
| | Trade payables, other accounts payable and accrued expenses |             
| |                                                             |             

F - 34

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---