As
filed with the Securities and Exchange Commission on June 29, 2007

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# UNITED STATES 
SECURITIES 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, 2006

# 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)

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

|                                    |                                       
|----------------------------------- | --------------------------------------
|
|
|
|
|Ordinary Shares, Par Value NIS 0.01 | Nasdaq Global Market                  
|                                    |                                       
|(Title of each Class)               | (Name of Exchange on which Registered)

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

None

(Title of Class)



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

None

(Title of Class)

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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: 27,436,090 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 xNo 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
financial statement item the registrant has elected to follow:

Item 17  o     Item 18  x

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   |                                                                              |     
|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                                                   | 16  
|ITEM 4A  | Unresolved Staff Comments                                                    | 31  
|ITEM 5.  | Operating and Financial Review and Prospects                                 | 31  
|ITEM 6.  | Directors, Senior Management and Employees                                   | 41  
|ITEM 7.  | Major Shareholders and Related Party Transactions                            | 53  
|ITEM 8.  | Financial Information                                                        | 55  
|ITEM 9.  | The Offer and Listing                                                        | 57  
|ITEM 10. | Additional Information                                                       | 58  
|ITEM 11. | Quantitative and Qualitative Disclosures About Market Risk                   | 65  
|ITEM 12. | Description of Securities Other than Equity Securities                       | 66  
|PART II  |                                                                              |     
|ITEM 13. | Defaults, Dividend Arrearages and Delinquencies                              | 66  
|ITEM 14. | Material Modifications to the Rights of Security Holders and Use of Proceeds | 66  
|ITEM 15. | Controls and Procedures                                                      | 67  
|ITEM 16. | [RESERVED]                                                                   | 67  
|ITEM 16A | Audit Committee Financial Expert                                             | 68  
|ITEM 16B | Code of Ethics                                                               | 68  
|ITEM 16C | Principal Accountant Fees and Services                                       |     
|ITEM 16D | Exemptions from the Listing Standards for Audit Committees                   | 68  
|ITEM 16E | Purchases of Equity Securities by the Issuer and Affiliated Purchasers       | 68  
|PART III |                                                                              | 68  
|ITEM 17. | Financial Statements                                                         | 69  
|ITEM 18. | Financial Statements                                                         | 69  
|ITEM 19. | Exhibits                                                                     | 69  

- 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 words,
but are not the only way these statements are identified. These statements discuss future
expectations, contain projections of results of operations or of financial condition or
state other forward-looking information. When considering such forward-looking
statements, you should keep in mind the risk factors and other cautionary statements in
this annual report. These 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 forward-looking statements as a result of various factors, including
all the risks discussed in Risk Factors and elsewhere in this annual report.

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

The
selected financial data set forth in the following table are derived from our consolidated
financial statements, which were prepared in U.S. dollars and in accordance with United
States Generally Accepted Accounting Principles (U.S. GAAP) and cover each of
the years in the five-year period ended December 31, 2006. 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 (loss)                                    |                        
|                                                       |                        
|Operating expenses:                                    |                        
|Research and development                               |                        
|Less: grants and participations                        |                        
|                                                       |                        
|                                                       |                        
|Research and development, net                          |                        
|Selling and marketing                                  |                        
|General and administrative                             |                        
|                                                       |                        
|Restructuring and non-recurring income                 |                        
|                                                       |                        
|                                                       |                        
|Total operating expenses                               |                        
|                                                       |                        
|                                                       |                        
|Operating profit (loss)                                |                        
|Financing income, net                                  |                        
|Other financial expenses - non-cash charge relating to |                        
|puttable warrant                                       |                        
|Other income                                           |                        
|                                                       |                        
|                                                       |                        
|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 amortization of deferred stock compensation presented in previous years was
          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 long-term receivables.
|-- | ------------------------------------------------------------------------------------------------------------------------------

|3. | In 2006, the amount includes a one-time charge of $11,887 related to an
          agreement with the Office of the Chief Scientist to terminate our grant program.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4. | Except for 2004, 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 operation 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

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

Although
we reported a profit in 2004, we incurred operating and net losses in every other fiscal
year from our inception, and we may incur losses in the future. We reported net losses of
$7.7 million for 2003, $3.8 million for 2005 and $5.5 million for 2006. As of December 31,
2006, our accumulated deficit was $133.7 million. In order to meet expanding sales and
operations requirements, our expenses may increase. As a result, net cash outflows may
continue for the near term, and we may again incur net operating losses. If our sales do
not increase or if our expenses increase at a greater pace than our revenues, continuing
profitability may not be achieved. We may not be able to sustain or increase profitability
on a quarterly or annual basis.

Our products have lengthy sales
cycles. This adds cost to our sales efforts and uncertainty as to their results.

Our
products have lengthy sales cycles. For example, it typically takes from six to twelve
months after we first begin discussions with a prospective customer before we receive an
order from that customer. Because of this, we are often required to devote more time to,
and spend more money on, marketing our products than would be necessary if sales were made
more quickly. In some instances, we participate in competitive bids in tenders issued by
existing or prospective customers. A tender process can continue for many months until a
decision is made.

The loss of one or more of our key
customers would result in a loss of revenues.

In
certain fiscal quarters, relatively few customers have accounted for a large percentage of
our revenues. During 2006, one customer represented 17% of our revenues. Our business may
be seriously harmed if we experience a loss of any of our significant customers, or we
suffer a substantial reduction in orders from these customers. The worldwide
telecommunications industry is dominated by a small number of large corporations, and we
expect that a significant portion of our future product sales per quarter will continue to
be concentrated in a limited number of customers. In addition, our customers typically are
not contractually obligated to purchase any quantity of products in any particular period
and product sales to major customers have varied widely from period to period. The loss of
any existing customer, a significant reduction in the level of sales to any existing
customer, or our inability to gain additional customers could result in further declines
in our revenues. If our revenues decline, our business, financial condition, and results
of operations could be harmed.

3

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

All
of our revenues are generated from sales of a single family of products, known as
FibeAir®. We expect sales of our FibeAir family of products to continue to
account for 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 these products than companies
that sell multiple product families. We also may not succeed in reducing the risk
associated with any slowdown in demand for our FibeAir products.

We rely on a limited number of
contract manufacturers to manufacture our products. This could result in a disruption in
supply of these products.

We
outsource all of our manufacturing processes to contract manufacturers. 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 manufacturers. This could delay
product shipments to our customers. Our manufacturers may themselves in the future
experience other manufacturing problems, including inferior quality and insufficient
quantities of components. These delays, quality problems and shortages could result in
delayed deliveries, penalties, equipment replacement costs and possible cancellation of
orders. If our manufacturers experience financial, operational, manufacturing capacity or
other difficulties, 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.
Moreover, qualifying new manufacturers and commencing volume production is expensive and
time consuming. If we are required or choose to change manufacturers, our sales and our
customer relationships may suffer.

Our contract manufacturers obtain
some of the components included in our products from a single source or a limited group of
suppliers. If they lose any of these suppliers, we may experience production 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 source supplier. Their dependence on a
limited number of suppliers subjects us to the following risks:

| |  | The
component suppliers could increase component prices significantly at any time and with
immediate effect. This would increase component procurement costs and could result in
reduced gross margins for us.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The
component suppliers may themselves experience shortages in components and interrupt or
delay their shipments to our manufacturers. This may delay our product shipments to our
customers and 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. If this occurs and we or our manufacturers are unable to develop alternative
sources for components, we might need to modify our products. This 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
force us to accept lower gross margins.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Our
manufacturers may purchase more inventory than is immediately required to compensate for
potential component shortages or discontinuation. Such inventory can become obsolete.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our business depends in part on
sales to original equipment manufacturers.

The
success of the sales of our products currently depends in part on existing relationships
with original equipment manufacturers, or OEMs, of telecommunications equipment. A portion
of our systems is sold to and through such OEMs rather than directly to end users or
indirectly through other channels. The sale of our products depends in part on the
OEMs active marketing and sales efforts as well as the quality of their post-sale
support. Sales through the OEMs channels expose our business to a number of risks,
each of which could result in a reduction in the sales of our wireless products. We face
the risks of termination of these relationships, consolidation of some of these OEMs,
financial problems they might encounter, or the promotion of competing products or
emphasis on alternative technologies by these OEMs, turning them into competitors rather
than partners. Any of the foregoing may result in decline in the purchase of our products.
In addition, our efforts to increase sales may suffer from the lack of brand visibility
resulting from OEMs sale of these products with their own brand names, or from our
inability to enter into relationships with additional OEMs that would give us better
penetration to existing and potential markets. On the other hand, increased sales through
OEMs could have a negative effect on our profitability, due to the possible need to lower
the prices at which we sell our products to our OEMs in order to allow them the profits
that they deem reasonable. If any of these risks materialize, we will need to develop
alternative methods of marketing these products. Until we do so, sales of our products may
decline.

4

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The creation of Nokia Siemens
Networks may lead to fewer purchases of our products by Nokia Siemens Networks, which
could result in decreased revenues.

In
January 2006, we entered into an OEM Purchase and Distribution Agreement (the OEM
Agreement) with Nokia Corporation. Under the OEM Agreement, Nokia agreed to include
Ceragons products with its microwave radio product portfolio as Nokia PowerHopper
Vario to provide complete cellular transmission networking solutions. During 2006, sales
to Nokia accounted for 17% of our revenues. 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. Nokia Siemens Networks (NSN), as the new company is known, began
operations in April 2007 and was assigned the OEM Agreement. Siemens has products and
capabilities to develop products which compete with some of ours, but it is as yet unclear
how the creation of NSN will affect purchases under the OEM Agreement. These effects can
be on a regional basis, product basis or customer basis. If NSN decides to promote
Siemens products rather than ours, it could become a competitor of ours in addition
to, or instead of, being a strategic partner, with the result that our sales to NSN could
decrease, and in turn our total revenues could decrease as well.

Our business depends in part on
sales of other companies products as an original equipment manufacturer.

The
success of the sales of our products currently depends in part on existing relationships
with companies whose products we sell on an OEM basis. These companies 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 depends in part on the quality of the
products, the ability of our OEM partners to deliver their products on time and their
ability to provide both presale and post-sale support. Sales of OEM products expose our
business to a number of risks, each of which could result in a reduction in the sales of
our wireless 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, turning them into competitors rather than partners. If any of
these risks materialize, we will need to develop alternative sources for these OEM
products. Until we do so, our revenues may decline.

If sufficient demand for our
wireless products does not develop, we will not be able to generate significant revenues
and we may not be profitable on an annual basis.

The
acceptance of the wireless equipment which we and our competitors sell as a means of
delivering data, video and voice traffic will depend upon numerous factors, including:

| |  | its
capacity to handle growing volumes of traffic;
| | - | --------------------------------------------------

| |  | its
cost effectiveness;
| | - | -----------------------

| |  | its
reliability and security;
| | - | -----------------------------

| |  | the
availability of sufficient equipment, frequency bands and installation sites; and
| | - | -------------------------------------------------------------------------------------

| |  | its
performance in extreme weather conditions.
| | - | ----------------------------------------------

If our products do not address these
factors in a manner which satisfies the requirements of prospective customers and
end-users, the demand for our products may be adversely affected and we may not be able to
generate significant revenues or operate profitably.

5

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If we do not succeed in developing
and marketing new and enhanced wireless products that keep pace with technological
developments and our customers needs, our revenues may not increase.

The
market for our products is new and emerging. It is characterized by rapid technological
advances, changing customer needs and evolving industry standards. 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; and
| | - | ------------------------------------------

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

We
are continuously seeking to develop new products and enhance our existing products.
Developing new products and product enhancements requires significant capital expenditures
and research and development resources and we are, therefore, being much more selective in
these investments. 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.

If our revenues continue to grow
at rates similar to those in the past, we may face problems in managing the growth of the
Company.

Our
revenues grew by 46.9% from 2005 to 2006, by 34.6% from 2004 to 2005, by 59.3% from 2003
to 2004 and 87.1% from 2002 to 2003. The number of units that we manufacture each year has
grown at higher rates. While past performance is no guarantee of future achievement, if
our growth continues at similar rates, we may face difficulties in coping with such
growth. Our success in handling rapid growth will depend on our ability to:

| |  | streamline
and automate processes in order to manufacture and deliver on time larger quantities of
equipment               than in previous years;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------

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

| |  | balance
the need for additional employees with the need to minimize costs; and
| | - | ------------------------------------------------------------------------------

| |  | maintain
the capital resources needed to finance such growth.
| | - | -------------------------------------------------------------

We face intense competition from
other wireless equipment providers. Our failure to compete effectively could hurt our
sales.

The
market for wireless equipment is rapidly evolving, fragmented, highly competitive and
subject to rapid technological change. Increased competition could result in reduced
demand for our products, price reductions and reduced gross margins, any of which could
seriously harm our business. A number of communications equipment suppliers, including (in
alphabetical order) Alcatel-Lucent, Dragonwave, Harris Stratex Networks, Huawei
Technologies, L.M. Ericsson, Motorola, NEC, Nera Networks, Nokia Siemens Networks, SIAE
Microelettronica, and ZTE Corporation, as well as other companies offer or are developing
products that may compete with our products.

Some
of our 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. Consolidation among some of our competitors, as seen in
the creation of Nokia Siemens Networks, the recent mergers of Alcatel and Lucent and of
Harris and Stratex Networks and the acquisition by Ericsson of Marconi and Redback
Networks, have increased the size and thus the competitive resources of these companies.
Some also have greater name recognition and a larger customer base than we have. Many of
our competitors have well-established relationships with our current and potential
customers and have extensive knowledge of our target markets. Some of our competitors have
product lines that compete with ours, and are also through which we market and sell our
products on an OEM basis. 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. We expect
to face increasing competitive pressures from both current and future competitors. In
addition, current and potential competitors may make strategic acquisitions or establish
cooperative relationships among themselves or with third parties to increase their ability
to gain market share rapidly. We also expect that industry consolidation will increase
competition.

6

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We believe that our ability to
compete successfully will depend on a number of factors both within and outside our
control, including price, quality, availability, manufacture by contract manufacturers,
customer service and support, breadth of product line, product performance and features,
rapid time-to-market delivery capabilities, reliability, timing of new product
introductions by us, our customers and our competitors, and the ability of our customers
to obtain financing. We cannot assure you that we will have the financial resources,
technical expertise, or marketing, sales, distribution and customer service and support
capabilities to compete successfully.

Competition and current market
conditions have resulted in downward pressure on the prices for our products, which could
result in decreased revenues.

We
participate in a highly volatile industry that is characterized by vigorous competition
for market share and rapid technological development. These factors have resulted in
aggressive pricing practices and growing competition both from start-up companies and from
well-capitalized telecommunication systems providers. Manufacturers of digital microwave
telecommunications equipment are experiencing price pressure, which has resulted in
downward pricing pressure on our products. Our future profitability is dependent upon our
ability to improve manufacturing efficiencies, reduce costs of materials used in our
products, and to continue to introduce new products and product enhancements. Pricing is
affected by other factors as well, 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. Any inability by us to effectively respond to
price pressures may harm our business, financial condition and results of operations.

We also face intense competition
from broadband technologies that compete with wireless transmission which could hurt our
sales.

Our
products also compete to a certain extent with other high-speed communications solutions,
including fiber optic lines, leased copper lines, free space optics, low- to
medium-capacity point-to-point radios and other wireless technologies. Some of these
technologies utilize existing installed infrastructure and have achieved significantly
greater market acceptance and penetration than high-capacity broadband wireless
technologies. In addition, customers may wish to use transmission frequencies for which we
do not offer products and, therefore, such customers turn to our competitors to fulfill
such needs. We expect to face increasing competitive pressures from both current and
future technologies in the broadband access market.

Consolidation within the
telecommunications industry and among suppliers could decrease our revenues.

The
telecommunications industry has experienced significant consolidation among its
participants, and we expect this trend to continue. Other operators may merge and one or
more of our competitors may supply products to such companies that have merged or will
merge. This consolidation could result in purchasing decision delays by the merged
companies and decrease opportunities for us to supply our products to the merged
companies. We may also see similar consolidation among suppliers which may further
decrease our opportunity to market and sell our products.

Part of our inventory may be
written off, thus adding to our cost of revenues.

In
2005, we wrote off excess inventory resulting from our decision to terminate our legacy
product line, close our in-house production facilities and transfer production activities
to our contract manufacturers. The result of the write-off in 2005 was a one-time charge
to cost of revenues of approximately $7.1 million. Inventory may again accumulate due to a
variety of factors: (a) new generations of products replacing older ones, as was the case
in 2005; (b) 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 (c) changes in products because of technological advances and cost reduction
measures. If inventory accumulates for any of these reasons, we may need to write off
parts of our inventory again, thus adding to our cost of revenues and reducing our
profitability.

7

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Our products may contain defects
that could harm our reputation, be costly to correct, expose us to litigation and harm our
operating results.

We
and our customers have from time to time discovered defects in our products and additional
defects may be found in the future. If defects are discovered, we may not be able to
correct them in a timely manner or at all. Defects and failures in our products could
result in a loss of, or a delay in, market acceptance of our products. In addition,
defects in our products could cause adverse publicity, damage our reputation and impair
our ability to acquire new customers. In addition, we may need to make significant capital
expenditures to eliminate defects from our products or to replace defective equipment.

Moreover,
because 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
seriously damage our reputation and our business.

Line-of-sight limitations inherent
in wireless products may limit deployment options and have an adverse affect on our sales.

Our
wireless products require a direct line-of-sight between antennas, potentially limiting
the ability of our customers to deploy them in a cost-effective manner. Because of
line-of-sight limitations, service providers often install wireless equipment on the
rooftops of buildings and on other tall structures. Communications service providers must
generally secure roof rights from the owners of each building or other structure on which
our products are installed. Any inability to obtain roof rights easily and cost
effectively may cause a delay in deployment and increase the installation cost of our
products or may cause customers not to choose to install wireless equipment.

Due to uncertainty and possible
delays in deployment of advanced cellular and other networks, our revenues could be lower
than expected due to delayed purchasing decisions by cellular and other customers for our
products.

We
have significantly increased sales to customers in the cellular market to support wireless
requirements for third generation cellular networks. For sales in the cellular market, any
delays by cellular providers in their third generation network deployment schedules could
result in lower than expected revenues for us, since any such deployment schedule delays
could result in delayed purchasing decisions by such customers.

Due to the volume of our
international sales, a significant portion of which are in emerging markets, we are
susceptible to a number of political, economic and geographic risks that could harm our
business if they occur.

We
are highly dependent on sales to customers outside the United States. We expect that
international sales will continue to account for the majority of our sales for the
foreseeable future. A significant portion of these sales are made in countries in south
Asia, southeast Asia and Africa. As a result, the occurrence of any international,
political, economic or geographic events that adversely affects our business could result
in significant revenue shortfalls.

Any
such revenue shortfalls could cause our business, financial condition and results of
operations to be harmed. The following are some of the risks and challenges of 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;
| | - | ------------------------------------------------

8

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| |  | 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;
| | - | --------------------------------------------------------

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

| |  | war
and acts of terrorism.
| | - | --------------------------

The unpredictability of our
quarter-to-quarter results may harm the trading price of our ordinary shares.

Our
quarterly operating results may vary significantly in the future for a variety of reasons,
many of which are outside of our control, and any of which may harm our business. These
factors include:

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

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

| |  | our
ability and the ability of our key suppliers to respond to changes made by customers in
their orders;
| | - | ---------------------------------------------------------------------------------------------------------

| |  | 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;
| | - | ---------------------------------------------------

| |  | downward
pricing pressure on our products;
| | - | ------------------------------------------

| |  | 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;
| | - | ------------------------------------------------

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

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

Our
quarterly results are difficult to predict and delays in product delivery or closing of a
sale can cause revenues and net income to fluctuate significantly from anticipated levels.
In addition, we may increase spending in response to competition or to pursue new market
opportunities. Accordingly, we cannot assure you that we will be able to sustain
profitability in the future, particularly on a quarter-to-quarter basis.

Our stock price may be volatile,
which may lead to losses by investors.

Announcements
of developments related to our business, announcements by competitors, quarterly
fluctuations in our financial results and general conditions in the telecommunications
industry in which we compete, or the economies of the countries in which we do business
and other factors could cause the price of our ordinary shares to fluctuate, perhaps
substantially. In addition, recently, the stock market has experienced extreme price
fluctuations, which have often been unrelated to the operating performance of affected
companies. These factors and fluctuations could lower the market price of our ordinary
shares.

9

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We are exposed to additional costs
associated with complying with increasing and new regulation of corporate governance and
disclosure standards.

As
a public company, we will be spending an increased amount of management time and resources
to comply with changing laws, regulations and standards relating to corporate governance
and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and
Nasdaq Stock Market rules. Particularly, as a foreign private issuer, we need to comply
with the provisions of Section 404 of the Sarbanes-Oxley Act in connection with the filing
of our annual report on Form 20-F for the fiscal year ending December 31, 2006. Section
404 requires managements annual review and evaluation of our internal controls over
financial reporting and managements attestation of the effectiveness of our internal
controls over financial reporting in connection with the filing of our annual report on
Form 20-F for the fiscal year ended December 31, 2006. For each subsequently filed annual
report on Form 20-F, we will also need the attestation of our independent public
accounting firm of the effectiveness of our internal controls over financial reporting. As
part of this process, we will need to document and test our internal control systems and
procedures and make improvements in order for us to comply with the requirements of
Section 404. This process will result in additional accounting and legal expenses. In
addition, if we are unable to implement required changes within the time limit imposed by
Section 404, it could result in our being unable to obtain an unqualified report on
internal controls from our independent auditors.

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

Radio
communications are subject to regulation by United States and foreign laws and
international treaties. Generally, our products must conform to a variety of United States
and international 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 such products.

In
addition, both in the United States and internationally, we are affected by the allocation
and auction of the radio frequency spectrum by governmental authorities. Such 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 unavailability of radio
frequency spectrum has inhibited the growth of wireless telecommunications networks. In
addition, to operate in a jurisdiction, we must obtain regulatory approval for our
products. Each jurisdiction in which we market our products has its own regulations
governing radio communications. Products that support emerging wireless telecommunications
services can be marketed in a jurisdiction only if permitted by suitable frequency
allocations and regulations, and the process of establishing new regulations is complex
and lengthy. If we are unable to obtain sufficient allocation of radio frequency spectrum
by the appropriate governmental authority or obtain the proper regulatory approval for our
products, our business, financial condition or results of operations may be harmed.

We are increasingly engaged in
supplying post-delivery services to our customers, often in developing nations, which are
subject to acceptance testing procedures. Any loss of products and delay or failure in
such acceptance tests would significantly affect our revenues and operating expenses. In
addition, we face intense competition from other equipment and services providers in
supplying such services. Our failure to compete effectively could adversely affect our
revenues.

As
we continue to expand our geographic footprint, we are increasingly engaged in supplying
post-delivery services for our customers, often in developing nations. We may act as prime
contractor and equipment supplier for network build-out projects and provide installation,
supervision and testing services required for these projects or we may provide such
services and equipment for projects handled by system integrators. 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 products do 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 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.

10

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The
competition for providing the services described above to end users and system integrators
is intense and is subject to factors similar to those described in the section above
regarding competition from wireless equipment providers. We cannot assure you that we will
have the financial resources, technical expertise, or marketing, sales, distribution and
customer service and support capabilities to compete successfully.

Our products operate primarily on
government-licensed radio spectrum frequencies. If a customer or end-user of our products
is unable to secure such a license, or if a holder of a license files for bankruptcy and
its license is unavailable, such customer or end-user of our products may be unable to
provide wireless communications services in the optimal transmission frequency and may not
deploy a wireless network using our products.

Our
products operate primarily on government-licensed radio spectrum frequencies. Users of our
products must either have a license to operate and provide communications services in the
applicable frequency or must acquire the right to do so from another license holder. If
unable to secure such a license, a customer or end-user may not deploy a wireless network
using our products. If a license holder of such radio spectrum frequency files for
liquidation, dissolution or bankruptcy, substantial time could pass before those licenses
are transferred, canceled, reissued or made available by the applicable government
licensing authority. Until the licenses are transferred, canceled, reissued or otherwise
made available, other operators may be precluded from operating in such licensed
frequencies, which could decrease demand for our products. In addition, if the authorities
choose to revoke licenses for certain frequencies, demand for our products may decrease as
well.

If there is a change in government
regulation, or if industry standards change, the potential markets for our products may
become limited and we may need to modify our products. This may increase our product costs
and adversely affect our ability to become profitable.

The
emergence or evolution of regulations and industry standards for wireless products,
through official standards committees or widespread use by operators, could require us to
modify our systems. This may be expensive and time-consuming. Radio frequencies are
subject to extensive regulation under the laws of the United States, foreign laws and
international treaties. Each country has different regulations and regulatory processes
for wireless communications equipment and uses of radio frequencies. Any failure by
regulatory authorities to allocate suitable, sufficient radio frequencies to potential
customers in a timely manner could negatively impact demand for our products and may
result in the delay or loss of potential orders for our products. In addition, if new
industry standards emerge that we do not anticipate, our products could be rendered
obsolete. There may be regulatory restrictions imposed due to environmental or health
concerns, such as restrictions imposed on the location and number of outdoor antennas.

# There may be health and
safety risks relating to wireless products.

In
recent years, there has been publicity regarding the potentially negative direct and
indirect health and safety effects of electromagnetic emissions from cellular telephones
and other wireless equipment sources, including allegations that these emissions may cause
cancer. Our wireless communications products emit electromagnetic radiation. 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.

Our products may not meet the new
European governmental regulations, including environmental standards, required for
their sale, which may negatively affect our sales.

Our
activities in Europe require that we comply with European Union Directives with respect to
product quality assurance standards and environmental standards. Directive 2002/95/EC on
Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic
Equipment (known as the RoHS Directive), requires products sold in Europe to
meet certain design specifications, which exclude the use of hazardous substances, took
effect on July 1, 2006 and requires that certain of our products be modified to meet this
regulation. Directive 2002/96/EC on Waste Electrical and Electronic Equipment (known as
the WEEE Directive) requires producers of electrical and electronic equipment
to register in different European countries and provide collection and recycling
facilities for used products. If we fail to achieve or maintain compliance, we may be
restricted from selling our products in the European Union and this could adversely affect
our results of operations.

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If we are unable to continue to
license technology from third parties on reasonable terms, we may be precluded from
selling products derived from licensed technology and we may be required to reduce the
functionality of our products. This may adversely affect our sales.

We
rely on technology that we license from third parties, including software that is
integrated with internally developed software and used in our products to perform key
functions. If we are unable to continue to license any of this software on commercially
reasonable terms, we will face delays in releases of our products and may be required to
reduce the operating capabilities of our products, for example, by reducing the number of
operating systems on which our products operate, until equivalent technology can be
identified, licensed or developed, and integrated into our current products.

If we are unable to protect our
intellectual property rights adequately, we may be deprived of legal recourse against
those who misappropriate our intellectual property.

Our
ability to compete will depend, in part, on our ability to obtain and enforce intellectual
property protection for our technology in the United States and internationally. We
currently rely upon a combination of trade secrets, trademark, copyright and contractual
rights to protect our intellectual property. In addition, we enter into confidentiality
and invention assignment agreements with our employees, and enter into non-disclosure
agreements with our suppliers and appropriate 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. In the event that such intellectual property arrangements are
insufficient, our business, financial condition and results of operations could be harmed.
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 United States 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.

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

The
wireless telecommunications industry is characterized by vigorous protection and pursuit
of intellectual property rights, which has resulted in often protracted and expensive
litigation. NEC Corporation, another telecommunications 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. 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 such discussions, including whether
there could be an adverse effect on our business. We may in the future be notified that we
are infringing certain patent or other intellectual property rights of others. Such
litigation or claim 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, cease the licensing of allegedly infringing technology or 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.

Our failure to retain and attract
personnel could harm our business, operations and product development efforts.

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. Competition for personnel in all of these
areas is intense 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 very 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.

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Our non-competition agreements
with employees may not be enforceable. If any of our employees leave us and join a
competitor, our competitor could benefit from the expertise our former employee gained
while working for us.

Our
non-competition agreements with permanent employees prohibit these employees from directly
competing with us or working for our competitors. However, under current law or possible
changes in the law, we may not be able to enforce these agreements to their fullest
extent. If we are unable to enforce any of these agreements, our competitors may employ
our former employees and benefit from the expertise our former employees gained while
working for us.

Due to the size of their
shareholdings, some of our shareholders, including Yehuda and Zohar Zisapel, have
significant influence over matters requiring shareholder approval. This could delay or
prevent actions that require shareholder approval.

As
of March 31, 2007, Yehuda and Zohar Zisapel, who are brothers that do not vote as a group
and who do not have a voting agreement, beneficially owned, directly or through entities
they control, an aggregate of 22.3% of the outstanding ordinary shares. As a result, these
shareholders may significantly influence the outcome of various actions that require
shareholder approval. For example, they may be able to delay or prevent a transaction in
which shareholders might receive a premium over the prevailing market price for their
shares or prevent changes in control or management.

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 2006 we were a passive foreign investment company. Foreign
companies may be characterized as a passive foreign investment company for U.S. federal
income tax purposes 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. These consequences may include 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 2006
or prior years. The tests for determining PFIC status are applied annually and it is
difficult to make accurate predictions of future income and assets, which are relevant to
this determination. Accordingly, there can be no assurance that we will not become a PFIC
in 2007 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 United States Federal Income Tax Considerations.

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
manufacturing facilities and subcontractors are located in Israel. Consequently,
political, economic and military conditions in Israel could directly affect our
operations. We could be adversely affected by any major hostilities involving Israel,
including acts of terrorism or any other hostilities involving or threatening Israel, the
interruption or curtailment of trade between Israel and its trading partners, a
significant increase in inflation or a significant downturn in the economic or financial
condition of Israel. Since October 2000, there has been an increase in hostilities between
Israel and the Palestinians, which has strained Israels relationship with its Arab
citizens, Arab countries and, to some extent, with other countries around the world. The
establishment in 2006 of a government in the Palestinian Authority by representatives of
the Hamas militant group has created additional unrest and uncertainty in the region.
Further, Israel was recently engaged in an armed conflict with Hezbollah, a Lebanese
Islamist Shiite militia group, which involved thousands of missile strikes and disrupted
most day-to-day civilian activity in northern Israel. Any armed conflicts, terrorist
activities or political instability in the region would likely negatively affect business
conditions and could harm our results of operations.

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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. We are also precluded from
marketing our products to certain of these countries due to U.S. and Israeli regulatory
restrictions. We believe that the boycott has not had a material adverse effect on us.
However, the boycott, restrictive laws, policies or practices directed towards Israel or
Israeli businesses could adversely affect us.

Some
of our executive officers and employees in Israel are, unless exempt, obligated to perform
annual military reserve duty, depending on their age and position in the army.
Additionally, they may be called to active duty at any time under emergency circumstances.
Our operations could be disrupted by the absence for a significant period 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. We believe that we have operated
effectively given these requirements since we began operations. Nevertheless, 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.

We
do not believe that the political and security situation in Israel has had any material
impact on our business to date. However, we can give no assurance that it will not have
such an effect in the future.

Since
a majority of our revenues is generated in U.S. dollars while a portion of our expenses is
incurred in new Israeli shekels, our results of operations would be adversely affected if
inflation in Israel is not offset on a timely basis by a devaluation of the new Israeli
shekel against the U.S. dollar, or if the NIS appreciates against the U.S. dollar.

A
majority of our revenues are in U.S. dollars, while a portion of our expenses, principally
salaries and the related personnel expenses for Israeli employees and consultants, local
vendors and subcontractors, are in NIS. As a result, we are exposed to the risk that the
rate of inflation in Israel will exceed the rate of devaluation of the NIS in relation to
the dollar or that the timing of this devaluation lags behind inflation in Israel. In
addition, we are exposed to the risk that the NIS will appreciate in relation to the
dollar. In 2006, the NIS appreciated against the U.S. dollar by 8.2%. Either of these
developments would have the effect of increasing the dollar cost of our operations and
would, therefore, have an adverse effect on our dollar-measured results of operations.

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
have 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. In late
December 2006, we entered into an agreement with the OCS to conclude our participation in
such grant programs sponsored by the OCS and to repay approximately $11.9 million in
outstanding grants owed to the OCS. However, the terms of these OCS grants, which limit
our ability to manufacture products or transfer technologies outside of Israel, if such
products or technologies were developed using know-how developed with or based upon OCS
grants, continue to apply to us. If we elect to transfer more than an insubstantial
portion of our manufacturing processes to contractors outside of Israel, we may be
required to pay additional royalties to the OCS. In addition, any non-Israeli who becomes
a direct holder of 5% or more of our share capital is generally 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.

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 manufacturing 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 five to 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.

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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 tax benefits thereunder 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, our
Israeli subsidiaries 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.

We
have been informed by our legal counsel in Israel, Goldfarb, Levy, Eran, Meiri & Co.,
that 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, under the rules of private
international law currently prevailing in Israel, Israeli courts may enforce a U.S. final
judgment in a civil matter, including judgments based upon the civil liability provisions
of the U.S. securities laws and including a monetary or compensatory judgment in a
non-civil matter, provided that:

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

| |  | adequate
service of process has been effected and the defendant has had a reasonable opportunity
to present his                   arguments and evidence;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
judgment and its enforcement are not contrary to the law, public policy, security or
sovereignty of the                   State of Israel;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------

| |  | 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 at
the time the                   lawsuit is instituted in the U.S. court.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

The
Companies Law generally provides that a merger be approved by the board of directors and
by the shareholders by means of a majority of the shares present and voting on the
proposed merger. The Companies Law has specific provisions for determining the majority of
the shareholder vote. 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. In general, a merger 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. Lastly, Israeli tax law treats some
acquisitions, such as stock-for-stock exchanges between an Israeli company and a foreign
company, less favorably than U.S. tax laws. These provisions of Israeli corporate and tax
law may have the effect of delaying, preventing or making more difficult an acquisition of
or merger with us, which could depress our share price.

|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, 2006, 2005 and 2004, our capital expenditures were $1.4
million, $0.9 million and $0.7 million, respectively, and were spent primarily on
investment in information-technology systems, equipment for research and development,
general computer software and hardware, production equipment and leasehold improvements.
We have no current commitments for capital expenditures.

# B. Business Overview

We
design, develop, manufacture and sell high-capacity, point-to-point wireless backhaul
solutions . Our products are used primarily by cellular operators to transport voice and
data traffic in the backhaul, the segment of the telecommunications network that connects
base stations to switch locations on the core network. Our products are also used by other
telecommunications service providers that operate wired or wireless networks and by
organizations and enterprises that operate their own private networks based primarily on
SDH/SONET and IP (Internet protocol) technologies.

Our
sales and profits have grown steadily on a quarter-to-quarter basis for the past five
years. For 2006, our revenues reached $108.4 million, an increase of 47% compared to 2005,
and for the first quarter of 2007 our revenues were $33.9 million, an increase of 59%
compared to the first quarter of 2006. Our growth is being driven by a number of factors,
including the expansion of our primary target market (high-capacity cellular backhaul);
the comprehensive range, robustness, scalability and flexibility of our product lines; the
ongoing extension of our sales channels (especially through the addition of strategic OEM
partners) and the expansion of our marketing and support resources. Recognizing the
opportunity inherent in the market for high-capacity backhaul solutions, we are currently
focusing the majority of our sales, marketing and R&D resources on this high-growth
market segment.

Worldwide
demand for high-capacity backhaul solutions has been growing due to a number of factors,
including:

16

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| |  | Strong
rises in the quantity of data traffic.The rising uptake of data-intensive
applications (video and music downloads, wireless Internet, etc.), together with a
continuous rise in the number of global cellular subscribers, has significantly increased
the load on backhaul capacity. For many cellular operators with existing networks
(especially in developed regions), backhaul has become a traffic bottleneck that impacts
the performance of the entire network, necessitating an expansion of the backhaul segment
to assure current and future service quality.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Rapid
build-out of new cellular networks in developing regions.Demand for cellular voice
and data services continues to grow in many developing regions (e.g. India, Asia-Pacific,
Africa), many of which have little existing wireline telecommunications infrastructure.
In these regions, end-to-end wireless networks have proven to be particularly desirable,
as they are much quicker and more cost-effective to install than comparable wireline
solutions.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

With
an extensive portfolio of high-capacity wireless backhaul products for both TDM (time
division multiplexing) and IP platforms, Ceragon has become one of the industrys
leading providers of complete backhaul solutions for cellular operators in all parts of
the world. To date, our products have been commercially deployed by over 200 customers in
approximately 85 countries. Our systems provide high-speed, fiber-like transmission
quality and can be deployed more rapidly and cost effectively than copper or fiber optic
lines. They operate over multiple licensed and unlicensed frequency bands in the range of
2.4 to 80 GHz, but are most commonly deployed on licensed bands.

Our
products are also used in a range of applications by other types of operators. For
example, incumbent local exchange carriers (ILECs) and other telecom operators that
operate wireline networks use our products as an extension to the existing fiber
infrastructure within their high-capacity metropolitan ring and access networks, and fixed
wireless operators (wireless ISPs and others) use our products for backhaul.

In
addition, a variety of public organizations (e.g., municipalities, governments) and
enterprises (e.g., corporations, hospitals) deploy our products for use in their own
private telecommunications networks.

We
sell our products to customers through a worldwide network of direct and indirect
channels. Our direct sales force includes approximately 40 salespeople operating out of 17
sales and support offices, and we work closely with major system integrators and
distributors in targeted regions. In addition, a significant and growing portion of our
sales are made on an original equipment manufacturer (OEM) basis to telecommunications
equipment vendors, including Nokia Siemens Networks and others.

Based
on our experience, the telecommunications equipment business is seasonal to the extent
that sales or order intake in the first quarter of each calendar year are typically lower
than in other quarters. Nevertheless, our historical results of operations do not reflect
such seasonality.

Industry Background:
Market Trends

Wireless
solutions as compared to other backhaul options:In meeting their backhaul
needs, cellular operators can choose from a variety of infrastructure options, each that
offer a mixture of advantages and disadvantages. Todays most widely deployed options
include leased telecom lines, fiber-optic lines and wireless links (singly or in
combination). The operators considerations in selecting the backhaul infrastructure
include the desire for rapid service deployment, scalability and minimization of capital
expenditure and operational expenses.

| |  | Leased
copper or fiber-optic linesfrom ILECs have been readily available to cellular
operators in many regions. However, their usage has been tied to the payment of an
expensive monthly fee, and in some cases requires the cellular operator to become
dependent upon a direct competitor. In addition, the leasing of copper lines saddles the
cellular operator with an absolute capacity problem which limits their ability to scale
to meet the network demands dictated by todays higher levels of voice and data
traffic.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Laying
of new fiber-optic cable is a reliable option that provides the operator with maximum
bandwidth at low operating costs. However, the laying of new cables is a time-consuming
and expensive process, and in many urban or geographically dispersed regions is very
difficult to achieve.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Wireless
links: High-capacity, carrier-grade wireless backhaul systems such as Ceragons
represent a scalable, quick-to-deploy solution at a reasonable capital cost. Once
installed, they belong to the operator, releasing them from dependence on  and cost
of  the lines of a competitor or a third party.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

17

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In
general, the need for higher-capacity backhaul solutions has been growing rapidly for the
past several years. This reflects a confluence of factors:

| |  | A
continuous rise in the number of mobile subscribers, translating into an increase in
the number of base stations and cell sites, which has in turn increased the need for
backhaul transmission capacity. Demand for cellular voice services continues to grow
strongly in emerging markets (rural areas and developing countries), while demand for
more data-intensive 3G services is growing in many markets where voice coverage is
already high.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Growing
demand for new higher-data services: As demand grows for data-intensive services
(mobile Internet, mobile TV, mobile gaming, downloadable music, MMS, video conferencing,
etc.), backhaul capacity becomes a constraining factor, representing a costly bottleneck.
To handle packetized voice and data services with existing TDM backhaul networks, some
mobile operators must multiply the leased lines dedicated to each cell site, thereby
eroding the profitability of their services. These considerations significantly enhance
the business proposition of migration to a wireless and IP-optimized wireless backhaul
solution.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Migration
to IP-based backhaul platforms: Since circuit switched (TDM) networks were designed
to handle voice traffic, they are not ideal for the transmission of data-intensive
services. The increased traffic of data services is causing more operators to want to
upgrade to an IP-based network, and with it an IP-based backhaul solution.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The
emergence of all-IP networks:There are several technologies that are being developed
in order to upgrade existing mobile networks. These technologies, generally referred to
as fourth generation or 4G, are based on IP. They include WiMAX(Worldwide
Interoperability for Microwave Access), viewed as the frontrunner, LTE (Long Term
Evolution) and UMB (Ultra Mobile Broadband). Backhaul for any of these technologies will
also need to be IP-based.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Ceragon Solution

We
offer a broad portfolio of high-capacity, point-to-point wireless backhaul solutions
designed to eliminate the backhaul capacity bottleneck and to enable the transition to an
all-IP infrastructure.

Each
of our products is comprised of four components: an outdoor unit, an indoor unit, a
compact high-performance antenna and a network management system.

| |  | Indoor
unitsconvert the transmission signals from digital to IF/radio 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
unitsare used to control power transmission, convert IF (intermediate frequency)
signals to RF (radio frequency) signals and vice versa, and to provide an interface
between antennas and indoor units. They are enclosed in compact weather-proof enclosures
fastened to antennas. Indoor units are connected to outdoor units by standard coaxial
cables.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Compact,
high-performanceantennasare used to transmit and receive microwave radio signals
between edge and core networks. They are mounted on poles which are typically mounted on
rooftops, towers or buildings.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | End-to-End
Network Management.Ceragon provides state-of-the-art management based on SNMP. Our
management applications are written in Java code and enable management functions at both
the element and network levels. The applications run on Windows 2000/2003/XP and Sun
Solaris.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

An
antenna, an outdoor unit and an indoor unit comprise a terminal. Two terminals are
required to form a radio link, which may extend across a distance of 40 miles and more.
The specific distance depends upon the customers requirements, the modulation scheme
chosen, the frequency utilized, the available line of sight, local rain patterns and
antenna size. Each link can be controlled by our network management software or can be
interfaced to the management network system of the service provider. The systems are
available in both split-mount and all-indoor installations.

18

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Product
Portfolios

We
market all of our products under the trademark FibeAir®. These products
utilize multiple modulation schemes which increase their flexibility by giving service
providers the ability to choose between increased range and increased spectral efficiency.

The
FibeAir family includes the following products:

IP
Portfolio

FibeAir
IP-MAX. This wireless native Ethernet solution provides from 50 to 900 Mbps of
transmission capacity for Fast Ethernet and Gigabit-Ethernet interfaces. The FibeAir
IP-Max answers the need of operators for the higher capacities required for providing
enhanced IP-based services in WiMAX, private and metropolitan area networks. It operates
in the frequency range of 6-38 GHz and is equipped with built-in XPIC and adaptive
modulation allowing QPSK and 16 to 256 QAM. The FibeAir IP-MAX is available with optional
AES encryption module.

FibeAir
Gigamax. The FibeAir Gigamax system provides full rate Gigabit Ethernet (up to 1.25
Gps) transmission capacity over 60, 70 and 80 GHz channels. This system allows low-cost
installation for transmission over short distances of up to 5,000 feet

Multi-Service
Portfolio

IP-MAX-MS.
          This system combines the native Ethernet capability of the IP-MAX with scalable
          and dynamic bandwidth allocation of TDM interfaces. It is intended for use in
          cellular networks currently using TDM in order to allow them to migrate easily
          to IP-based networks.

FibeAir
4800. The FibeAir 4800 system is designed to provide up to 48 Mbps of aggregate
capacity over license-exempt channels in the 2.4GHz to 5.85 GHz range. This system may be
used for transmission over distances up to 50 miles and offers integrated Fast Ethernet
and N x E1/T1 interfaces.

High
Capacity SDH Portfolio

FibeAir
1500P. The FibeAir 1500P system provides from 155 to 622 Mbps of transmission capacity
for SDH/SONET interfaces. The 1500P transmits over a 28/50/56 MHz channel using single or
dual independent, hot swappable carriers with optional cross-polar interference canceller
(XPIC) mechanism. Each carrier is equipped with a built-in software configurable modem,
allowing 16, 32, 64, 128 or 256 QAM modulation schemes for improved spectrum utilization.
The FibeAir 1500P is available with optional module for AES encryption that has been
approved to FIPS 140-2 Level 2.

High
Capacity PDH/Ethernet Hybrid Solution

FibeAir
640P. This system is designed to offer cellular operators a migration path from
mid-capacity PDH/Ethernet to high-capacity PDH/Ethernet network access. It allows
operators to upgrade their links without costly additional investments in equipment. The
FibeAir 640P system provides multiple TDM capacities from 32 to 64 E1s and from 28 to 64
T1s together with intelligent Fast Ethernet networking. The system operates in the 6-38
GHz frequency range.

Long-Haul
Wireless Solution

FibeAir
1500HP.The FibeAir 1500HP is the Companys long haul wireless system. The system
offers embedded space diversity with dual receiver architecture, extremely high transmit
power and IF combining algorithm intended to provide superior performance and errorless
transmission. For operators this means a reliable, easily-deployed solution that can use
less equipment and smaller antennas, providing substantial savings on initial investments
and operational expenditures. The system operates in the frequency range of 6-11 GHz and
is equipped with built-in XPIC, software configurable modulation allowing QPSK and 32 to
256 QAM, and configurable bandwidth from 10 to 40 MHz.

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Trunk
Radio Solution

FibeAir
3200T. The FibeAir 3200T is an N+1 solution in either all-indoor or split-mount
configuration that provides wireless high-capacity data transmission over long distances,
in a wide variety of network capacities, frequencies and configurations. It is designed to
provide maximum protection and availability for fixed and mobile backhaul and backbone
networks. FibeAir 3200T operates in the frequency range of 6-11 GHz and can be easily
upgraded from 45 Mbps up to N+1 x 155 Mbps.

End-to-End
Network Management. Ceragon provides state-of-the-art management based on SNMP. Our
management applications are written in Java code and enable management functions at both
the element and network levels. The applications run on Windows 2000/2003/XP and Sun
Solaris.

| |  | CeraView® is
Ceragons SNMP-based EMS (Element Management System) that enables the operator to
perform element configuration, RF and SDH performance monitoring, remote diagnostics,
alarm reports and more. CeraView integrates with different 3rd party NMS (Network
Management System) platforms to provide end-to-end system management.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | PolyView is
Ceragons NMS server that includes CeraMap, its friendly yet powerful client
graphical interface. PolyView can be used to update and monitor network topology status,
provide statistical and inventory reports, define end-to-end traffic trails, download
software and configure elements in the network. In addition, it can integrate with
Northbound NMS platforms, to provide enhanced network management.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Advantages
of Ceragons Products:

We
believe that our products offer the following competitive advantages:

| |  | High-Speed,
High-Quality Communications. Our products enable the delivery of full-duplex,
high-speed Internet access and integrated data, video and voice communications at
superior transmission speeds (50-900 Mbps over licensed bands and up to 1.25 Gbps over
unlicensed frequency bands). Our products deliver fiber-like transmission quality with
error rates of less than one error per ten trillion bits transmitted.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Native
IP/Fast Ethernet/Gigabit Ethernet Platform. Our IP products offer native Fast and
Gigabit Ethernet wireless transmission with fiber-like quality. With what management
believes is the highest available throughput on the market, this native Ethernet solution
with ultra-low latency (delay) is optimized for IP-based applications including mobile
backhauling, IP-DSLAM connectivity for voice over IP, Internet and video services, WiMAX
backhauling and any delay-sensitive application. Our carrier-class products are
upgradeable, with capacities starting from 50 to 900 Mbps. Our products deliver Gigabit
Ethernet for ultra-high capacity IP connections in metropolitan rings, high-speed access
connections and private networks over a dual-carrier system of up to 900 Mbps system. In
addition, our products deliver two Fast Ethernet channels over a single 200 Mbps system
where dynamic bandwidth allocation is used to share the overall capacity between the two
Fast Ethernet channels. Each Fast Ethernet channel can provide a separate, secure
connection to a business subscriber. With built-in Ethernet traffic balancing, quality of
service and multi-service transport of data and voice interfaces over a single radio
carrier, we substantially reduce the service providers costs by eliminating the
need to purchase external equipment or double the links.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Cost
Effectiveness. Our products enable operators to avoid the high costs associated with
the deployment of independent fiber optic networks, including the cost of digging up
streets, obtaining municipal permits and laying of fiber optic lines (which costs
approximately $130,000 per mile in municipal regions). Further, our wireless products can
be redeployed and reused at a negligible cost, making them ideal as a movable temporary
solution in areas where new cable is being laid. In comparison to leased lines, our
products have very low operating costs.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | Rapid
Deployment and Time to Market. Our products can deployed within hours, allowing
operators to provide new services  and thereby to generate new revenues  more
quickly than with wireline equipment.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Spectral
efficiency to further increase capacity. With FibeAir platforms, traffic capacity
throughput and spectral efficiency are optimized for the desired channel bandwidth. For
maximum flexibility on the part of the user, channel bandwidths can be selected together
with a wide range of modulations. High spectral efficiency is ensured by choosing the
same bandwidth for double the capacity, via two carriers with vertical and horizontal
polarizations. This feature is implemented by a built-in cross polarization interference
canceller (XPIC) mechanism.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Optimization
for high capacity and long haul. Ceragons innovative long-haul products were
designed as a wireless networking solution for end-to-end, long-distance connectivity
allowing the deployment of voice and data services for fixed and mobile backhaul
networks. Our long-haul products can be installed as split-mount radio or all-indoor
radio installation. Ceragons unique embedded space diversity with dual-receiver
architecture, extremely high transmit power and IF combining algorithm guarantee superior
performance and errorless transmission. For operators this means a reliable solution that
can use less equipment and smaller antennas, providing substantial savings on initial
investments and operating expenses.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Multi-Protocol
Options. Our products work with the most common transmission standards used in
communications networks around the world, including Ethernet, IP, SONET/SDH and ATM
protocols. All solutions offer an easy migration path to next-generation platforms.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Variety
of Frequency Bands. Service providers select the optimal available transmission
frequency based on the rainfall intensity in the transmission area and the desired
transmission range. Regulators grant licenses to operate and provide communication
services in various frequency bands in each region, although in some cases, a customer
may be able to operate in a band which is exempt from licensing processes. The regulated
bands are allocated by government licensing authorities for high-capacity transmissions
in the metropolitan area. Our products operate in the 6, 7, 8, 11, 13, 15, 18, 23, 26,
28, 29, 31, 32 and 38 GHz frequency bands, the principal licensed bands currently
available for commercial use throughout the world. In addition, some of our products are
designed to operate in the 2.4  5.85 GHz and 60 GHz unlicensed frequency bands.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Meet
Multiple Regulatory Standards. We design all our products to meet the most stringent
North American and European standards.
| | - | --------------------------------------------------------------------------------------------------------------------------------

| |  | Modular
Architecture. Our products contain plug-in hot swappable units that can easily be
replaced or exchanged in the field. This allows us to standardize our manufacturing
process, while still manufacturing each product to meet the individual requirements of
each service provider. It also enables service providers to easily adapt our products for
use in different network environments.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Integrated
Multiple Access Design. By replacing a module in our basic product, a service
provider can allocate the transmission capacity and physical interfaces over multiple
transmission lines. This unique feature substantially reduces the service providers
costs by eliminating the need to purchase external equipment that would otherwise be
needed for this purpose.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Scalability
and Flexibility. We design our products to enable incremental deployment to meet
increased service demand. This allows the service providers to take a pay as you
grow approach, matching capital outlays with subscriber growth. As a result, our
customers can establish a wireless broadband network with a relatively low initial
investment, in comparison with fiber optic lines, and later expand the geographic
coverage area of their networks and increase the number of points that can be served on
their networks as subscriber demand increases.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | High
Reliability and Availability. We design our products to match the reliability
standard required by service providers, including 99.999% (five nines)
availability, maintaining continuous connectivity with a maximum of five minutes of
downtime per year. This enables our customers to provide their subscribers with the same
high availability as is offered by incumbent carriers using fiber optic networks. In
addition, our products can be configured to provide full redundancy by connecting two
radio links over the same frequency channel. This feature minimizes service
interruptions.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Encryption.
In the security area, we offer a built-in, AES-based encryption solution. Our
user-friendly EncryptAir solution has been validated by the National Institute of
Standards and Technology (NIST) to the US Federal Information Processing Standards (FIPS)
140-2 Level 2 security standard that is required by certain US military end-users.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Multiple
Modulation Schemes. The FibeAir product family utilizes multiple modulation schemes,
including QPSK, 16, 32, 64, 128, and 256 QAM enabling broadband wireless service
providers to choose between increased range and increased spectral efficiency.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

These
benefits may be offset by the following disadvantages and limitations of our wireless
solutions, which are common to competing wireless point-to-point telecommunications
products. Such disadvantages include:

| |  | Extreme
Weather Conditions. Our products may not operate optimally in certain extreme weather
conditions, including severe rainfalls or hurricanes.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Line-of-Sight
Limitations. Since our products require a direct line-of-sight between antennas,
service providers often install our products on cellular 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 cost of our products or cause service providers not to install broadband
wireless equipment.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Frequency
Bands. To operate our products, service providers must in most cases have a license
to operate and provide communications services in the optimal available transmission
frequency, or acquire the right to do so from a licensee. If a service provider is unable
to secure such a license, it will not be able to operate and provide wireless
communications services in the optimal transmission frequency. This may deter a service
provider from deploying a wireless network.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Customer
Service and Support

We
are committed to providing our customers with high levels of service and support. We
support our products with documentation and training courses tailored to our
customers various needs. Our sales and network field engineering services personnel
work closely with customers, system integrators and others to coordinate network design,
ensure successful installation and provide continuous customer support. We are
increasingly engaged in projects in which we supply, either directly or through
subcontractors, the required installation, supervision and testing services. We provide
technical assistance and customer support 24 hours a day, 7 days a week. We have the
capability to remotely monitor the in-network performance of our products and diagnose and
address problems that may arise. We assist our customers in utilizing our network
management software within their own internal network operations control centers.

Customers
and Markets

We
began selling our products commercially during the second half of 1998. We have sold our
products directly to more than 200 customers (including carriers, service providers,
system integrators and distributors) in approximately 85 countries.

Our
sales to customers are based on written purchase agreements or purchase orders.

Our principal
end-user customers are cellular operators. For these customers, our products are used to
expand backhaul network capacity, to reduce backhaul costs and to support the provision of
advanced telecommunications services. We also sell systems for a variety of applications
to other service providers and to organizations and enterprises that operate their own
private networks.

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The
following table summarizes the distribution of our revenues by geographic market, stated
as a percentage of total revenues for the periods indicated:

| | Region        | 2004 | 2005 | 2006
| | ------------- | ---- | ---- | ----
|
|
|
|
| | North America |      |      |     
| | EMEA*         |      |      |     
| | Asia-Pacific  |      |      |     
| | Latin America |      |      |     

* Europe, Middle
East, and Africa

Distribution
Channels

We
sell our products directly to end users as well as indirectly through a variety of
channels, including distributors, system integrators and OEMs.

Our
international direct sales force operates from 17 offices located around the world. Our
sales efforts are augmented in many cases by local agents and distributors. We currently
function as an OEM supplier to three manufacturers, which cumulatively accounted for
approximately 25% of our sales in 2006. Our largest OEM partner is Nokia Siemens Networks,
with whom we signed an OEM agreement in January 2006 following several years of joint
activities on an informal basis. We plan to invest additional efforts in the development
of such alliances in order to provide greater access to our target markets.

The
principal goal of our marketing program is to educate existing and potential customers
about the capabilities and benefits of our products and solutions. We are also committed
to developing and enhancing the awareness of our company and our products. 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. We employ an outsourced 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. We have
outsourced all of our manufacturing operations to contract manufacturers in Israel and the
Philippines, and have outsourced our warehouse operations to a subcontractor in Israel as
well. During the second half of 2006, we ceased our Tel Aviv manufacturing operations as
part of the phase-out of our legacy FibeAir 1500 products.

The
raw materials for our products come from sources throughout the world. At the beginning of
2006, we and our contract manufacturers experienced manufacturing delays due to the
worldwide shortage of certain components. We cannot assure you that such shortages will
not occur again in the future.

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 recently
enacted 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. If we fail
to achieve and maintain compliance, we may be restricted from selling our products in the
European Union, a development that could adversely affect our operating results.

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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 that vary in size and in the types
of products and solutions they offer. Our primary competitors are companies that offer
point-to-point wireless network solutions, including Alcatel-Lucent, Harris Stratex
Networks, L.M. Ericsson, NEC Corporation, Nera Networks, Nokia Siemens Networks and SIAE
Microelettronica, as well as a number of other companies, such as DragonWave, Huawei
Technologies, Motorola and ZTE Corporation, that offer or are developing products that
compete with ours. We believe we compete principally on the basis of:

| |  | Product
superiority: performance, reliability, robustness, scalability, flexibility and design;
| | - | -----------------------------------------------------------------------------------------------

| |  | Range
of product portfolio, including ability to provide both TDM and IP solutions, therefore
providing a migration path for TDM to IP;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------

| |  | Cost;
and
| | - | ---------

| |  | Deployment,
support and technical service experience and track record.
| | - | ----------------------------------------------------------------------

Our
products also compete with other high-speed communications solutions, including fiber
optic lines, free space optics (to a limited extent) and other wireless technologies.

Intellectual
Property

To
safeguard our proprietary technology, we rely on a combination of 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.

The
protective steps we have taken may be inadequate to deter misappropriation of our
technology and information. We may be unable to detect the unauthorized use of, or take
appropriate steps to enforce, our intellectual property rights. Some of the countries in
which we sell our products do not protect a companys intellectual property to the
same extent as the United States and Israel. In addition, our competitors may
independently develop technologies that are substantially equivalent or superior to our
technology. Any licenses for intellectual property that might be required for our services
or products may not be available on reasonable terms.

We
have registered trademarks for the standard character mark Ceragon Networks and our logo
in the United States, Israel, and the European Union, and for the standard character mark
Ceragon Networks in Canada. We have registered trademarks for our design mark for FibeAir
in the United States, Israel and the European Union. In addition, we have a registered
trademark in the United States for the standard character mark FibeAir.We also
have registered trademarks for the standard character mark CeraView in the United States,
Israel and the European Union.

Conditions
in Israel

We
are incorporated under the laws of the State of Israel. Our principal offices and research
and development facilities are located in Israel, as well as some of the contractors to
which we have outsourced our manufacturing. Therefore, we are directly affected by
political and military conditions which are discussed in the Risks Relating to our
Location in Israel in Item 3D above, and economic conditions in Israel, which could
affect our U.S. shareholders.

24

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| | Economic
Conditions
| | -------------------

Israels
economy has been subject to numerous destabilizing factors, including a period of rampant
inflation in the early to mid-1980s, low foreign exchange reserves, fluctuations in world
commodity prices, military conflicts and civil unrest. The Israeli government has
intervened in various sectors of the economy by utilizing fiscal and monetary policies,
import duties, foreign currency restrictions and control of wages, prices and foreign
currency exchange rates. In 1998, the Israeli currency control regulations were
liberalized significantly to allow Israeli residents to deal in foreign currency and
non-residents of Israel to purchase and sell Israeli currency and assets. The Israeli
government has periodically changed its policies in these areas. There are currently no
Israeli currency control restrictions on remittances of dividends on the ordinary shares
or the proceeds from the sale of the shares. However, legislation remains in effect under
which currency controls can be imposed by administrative action at any time.

The
Israeli governments fiscal policy and the Bank of Israels monetary policy
contributed to relative price stability in recent years, despite improved rates of
economic growth and a decline in the rate of unemployment. However, we cannot assure you
that prices and exchange rates will remain stable. Price and exchange rate instability may
have a material adverse effect on us.

| | Trade
Relations
| | ---------------

Israel
is a member of several international organizations, such as the United Nations, the
International Monetary Fund, the International Bank for Reconstruction and Development and
the International Finance Corporation. Among others, Israel is a member of the World Trade
Organization and is a signatory to the General Agreement on Trade in Services. In
addition, Israel has been granted preferences under the Generalized System of Preferences
from several countries, among them Japan. These preferences allow Israel to export
products covered by these programs either duty-free or at reduced tariffs.

Israel
and the European Union concluded a free trade agreement in 1975 which confers various
advantages on Israeli exports to most European countries and obligates Israel to lower its
tariffs on imports from these countries over a number of years. In 1985, Israel and the
United States entered into an agreement to establish a free trade area. The free trade
area has eliminated all tariff and specified non-tariff barriers on most trade between the
two countries. In January 1993, an agreement was entered into between Israel and the
European Free Trade Association, known as the EFTA, establishing a free-trade zone between
Israel and EFTA nations. In 1995, Israel entered into a new agreement with the European
Union, which includes modified rules of origin and other improvements, including providing
for Israel to become a member of the research and technology programs of the European
Union. In recent years, Israel has established commercial and trade relations with a
number of other nations, including Russia, China, India, Turkey and other nations in
Eastern Europe and Asia.

| | Israeli
Tax Considerations and Government Programs
| | --------------------------------------------------

The
following is a summary of the current tax structure applicable to companies in Israel,
with special reference to its effect on us. The following also contains a discussion of
the Israeli government programs benefiting us. To the extent that the discussion is based
on new tax legislation which has not been subject to judicial or administrative
interpretation, we cannot assure you that the tax authorities or the courts will accept
the views expressed in this discussion. The discussion is not intended, and should not be
taken, as legal or professional tax advice and is not exhaustive of all possible tax
considerations.

| | General
Corporate Tax Structure in Israel
| | -----------------------------------------

Israeli
companies are generally subject to corporate tax on their taxable income at the rate of
31% for the 2006 tax year and 29% for the 2007 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
as follows: 27% for the 2008 tax year, 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.

25

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| | 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 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.

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.

26

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The
Investment Center has granted approved enterprise status to three investment programs at
our manufacturing 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 will be 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. 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.

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
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

27

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| |  | 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 $20M 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 will take 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, 2006, we did not generate income under the provisions of the new law.

| | Grants
under the Law for the Encouragement of Industrial Research and Development, 1984
| | ---------------------------------------------------------------------------------------

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 are required to repay the OCS
approximately $11.9 million in outstanding grants, in semiannual installments from 2007
through 2009. We are required to continue reporting to the OCS concerning our sales every
quarter. As part of each report, we are required to calculate the amount we would be
obligated to pay the OCS if we paid a royalty of 3.15% on all our sales for such quarter.
If the resulting amount is more than the amount which is one-sixth of the $11.9 million
obligation, we will be required to pay the difference upon making the report. However, any
such payments will be applied to the last semiannual installments such that the total
obligation will not be increased and the period for paying it may be shortened. We entered
into that agreement because we believe 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, which intends 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.

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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 recent 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 allows for the approval of grants
in cases in which the applicant declares that part of the manufacturing will be performed
outside of Israel or by non-Israeli residents and the research committee is convinced that
doing so is essential for the execution of the program. This declaration will be a
significant factor in the determination of the OCS whether to approve a program and the
amount and other terms of benefits to be granted. For example, the increased royalty rate
and repayment amount will be required in such cases. If we elect to transfer more than an
insubstantial portion of our manufacturing processes to contractors outside of Israel, we
may be required to pay higher royalties to the OCS.

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.

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.

| | 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.

29

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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;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 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 are 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 obligates 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 a one-year extension regarding
2006.

The
Israeli Income Tax Ordinance and regulations promulgated thereunder allow
Foreign-Invested Companies, which maintain their accounts in U.S. dollars in
compliance with the regulations published by the Israeli Minister of Finance, to base
their tax returns on their operating results as reflected in the dollar financial
statements or to adjust their tax returns based on exchange rate changes rather than
changes in the Israeli CPI, in lieu of the principles set forth by the Inflationary
Adjustments Law. For these purposes, a Foreign-Invested Company is a company, more than
25% of whose share capital, in terms of rights to profits, voting and appointment of
directors, and of whose combined share and loan capital is held by persons who are not
residents of Israel. A company that elects to measure its results for tax purposes based
on the dollar exchange rate cannot change that election for a period of three years
following the election. We believe that we qualify as a Foreign Investment Company within
the meaning of the Inflationary Adjustments Law. Commencing with the year 2003, we elected
to base our tax returns on our operating results in U.S. dollars as reflected in our
financial statements.

30

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C.
Organizational Structure

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

| | Company                                  | Place of Incorporation | Ownership Interest
| | ---------------------------------------- | ---------------------- | ------------------
|
|
|
|
| | Ceragon Networks (Aus) Pty Ltd           |                        |                   
| | Ceragon Networks do Brasil Limitada      |                        |                   
| | Ceragon Networks (UK) Limited            |                        |                   
| | Ceragon Networks SARL                    |                        |                   
| | Ceragon Networks (HK) Limited            |                        |                   
| | Ceragon Networks (India) Private Limited |                        |                   
| | Ceragon Networks, S.A. de C.V.           |                        |                   
| | Ceragon Networks, Inc.                   |                        |                   
| | Ceragon Networks (Philippines), Inc.     |                        |                   

# 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 55,000 square
feet in Tel Aviv, Israel. The leases for this space are valid until May 2008, with an
option to renew for an additional one-year period.

In
the United States, we lease approximately 5,100 square feet in Paramus, New Jersey, for
our North American headquarters. The lease in Paramus is valid until September 2008. 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.

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

The
following discussion and analysis should be read in conjunction with our consolidated
financial statements and the notes to those financial statements that appear elsewhere in
this annual report. Our consolidated financial statements are prepared in conformity with
U.S. GAAP.

# Overview

We
design, develop, manufacture and sell high-capacity wireless backhaul solutions for
cellular operators, fixed operators and private networks and enterprises.

A
majority of the revenues of the Company and certain of its subsidiaries are generated in
U.S. dollars. In addition, a substantial portion of the Companys and certain of its
subsidiaries costs is incurred in dollars. We use the dollar as our functional
currency. Transactions and balances in other currencies are remeasured into 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. Our consolidated financial statements are prepared in dollars.

We
expect our operating results to fluctuate in the future as a result of various factors,
many of which are outside our control. Consequently, we believe that period-to-period
comparisons of our operating results may not necessarily be meaningful and, as a result,
you should not rely on them as an indication of future performance.

31

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Revenues.
          We generate revenues from the sale of our products, those of other parties and
          services. We recognize revenues from the sale of our products in accordance
with           SEC Staff Accounting Bulletin No. 104, Revenue Recognition, and
          FASBs Emerging Issue Task Force (EITF) Issue No. 00-21,
          Revenue Arrangements with Multiple Elements. We price our products
          on a per unit basis according to a price list. However, the final price to the
          customer may vary according to 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.
          We sell our products directly and through distribution channels worldwide. In
          2006, approximately 26% of our revenues were generated in North America, 38%
          were generated in Europe, Middle East, and Africa, 30% were generated in the
          Asia-Pacific region and 6% were generated in Latin America.

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, subcontractor fees, royalties, estimated warranty costs, overhead related to
manufacturing and depreciation of manufacturing equipment, shipping and royalties to the
Government of Israel in connection with grants we received from the OCS. Our gross profit
is affected principally by the selling prices for our products and the related cost of
revenues.

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. Until 2006, research and development expenses
were offset by royalty-bearing grants from theOCS. We believe continued investment in
research and development is essential to attaining our strategic objectives. We no longer
intend to receive grants from the OCS.

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, 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
monetary balance sheet items denominated in non-dollar currencies into dollars, gains and
losses from our currency hedging activity, and fees and commissions paid to banks.

Taxes.See Israeli Tax Considerations and Government Programs in Item 4
          for a discussion of tax and other laws applicable to the Company. We have
          accumulated operating loss carry-forwards and, therefore, we have no tax
expense           in 2006.

32

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# Results of Operations

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

|                                | 2004 | 2005 | 2006
|------------------------------- | ---- | ---- | ----
|
|
|
|
|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      |      |      |     
|                                |      |     
|Total operating expenses        |      |      |     
|                                |      |      |     
|                                |      |     
|Operating income (loss)         |      |      |     
|Financial income, net           |      |      |     
|                                |      |     
|Other Income                    |      |      |     
|                                |      |      |     
|                                |      |     
|Net income (loss)               |      |      |     
|                                |      |      |     

*The amortization of deferred stock
compensation was reclassified in the relevant expense line.

# Years Ended December 31,
2005 and 2006

Revenues.Revenues increased from $73.8 million for the year ended December 31, 2005
          to $108.4 million for the year ended December 31, 2006, an increase of $34.6
          million, or 46.9%. Quarterly revenues increased sequentially during 2006 from
          $21.3 million in the first quarter to $32.9 million in the fourth quarter. This
          increase was attributable primarily to greater demand for our products by our
          customers as well as to our OEM agreement with NSN and increased sales via our
          OEMs.

Cost
of Revenues. Cost of revenues increased from $52.5 million for the year ended December
31, 2005 to $80.8 million for the year ended December 31, 2006, an increase of $28.3
million, or 53.9%. This increase was attributable to two factors: (a) increased materials
purchased in connection with our increased revenues; and (b) a one-time charge of $10.4
million related to the termination of our participation in the OCS grant program. As a
result of the OCS agreeing to terminate the program, we undertook to repay the OCS the
amount of the outstanding grants (approximately $11.9 million as of December 31, 2006) in
semiannual installments from 2007 through 2009.

Gross
profit as a percentage of revenues decreased from 28.9% for the year ended December 31,
2005 to 25.5% for the year ended December 31, 2006. The decrease resulted from (a) the
one-time charge described in the previous paragraph; (b) increased revenues from sales to
OEMs that have lower profitability than direct sales; and (c) increased revenues from
sales to customers in certain Asian countries, especially India, that have lower
profitability than sales in other regions.

33

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Research
and Development Expenses, Net. Our gross research and development expenses increased
from $10.7 million for the year ended December 31, 2005 to $13.3 million for the year
ended December 31, 2006, an increase of $2.6 million, or 24.5%. The increase in our gross
research and development expenses was attributable primarily to the hiring of additional
personnel and the increase of our research and development activities with subcontractors.
During the year ended December 31, 2006, we recognized $1.5 million in research and
development grants from the OCS, compared to $1.8 million during the year ended December
31, 2005. Our net research and development expenses thus increased from $9.0 million for
the year ended December 31, 2005 to $11.8 million for the year ended December 31, 2006, an
increase of $2.8 million or 31.6%.

Selling
and Marketing Expenses.Selling and marketing expenses increased from $13.6 million
for the year ended December 31, 2005 to $17.4 million for the year ended December 31,
2006, an increase of $3.8 million, or 27.8%. This increase was attributable primarily to
the hiring of additional personnel and an increase in sales commissions.

General
and Administrative Expenses.General and administrative expenses increased from $3.2
million for the year ended December 31, 2005 to $5.2 million for the year ended December
31, 2006, an increase of $2.0 million, or 63.0%. This increase was attributable primarily
to an increase in compensation expenses and the recording of stock-based compensation
expenses as a result of adopting SFAS 123(R).

Financial
Income, Net.Financial income, net increased from $$0.6 million for the year ended
December 31, 2005 to $1.3 million for the year ended December 31, 2006, an increase of
$0.7 million or 112%. This increase was attributable primarily to interest income earned
on marketable securities and deposits resulting from an increase in interest rates in 2006
compared with 2005 and to net gain resulting from currency fluctuations.

Net
Loss. The Company recorded a net loss in 2006 of $5.5 million as compared with a net
loss in 2005 of $3.8 million, primarily due to the one-time charge of $10.4 million
related to the termination of our participation in the OCS grant program.

# Years Ended December 31,
2004 and 2005

Revenues.Revenues increased from $54.8 million for the year ended December 31, 2004
          to $73.8 million for the year ended December 31, 2005, an increase of $19.0
          million, or 34.6%. Quarterly revenues increased sequentially during 2005 from
          $16.8 million in the first quarter to $20.1 million in the fourth quarter. This
          increase was attributable, as in previous years, primarily to increased sales
to           cellular and fixed operators and private networks and enterprises in a
growing           number of countries.

Cost
of Revenues. Cost of revenues increased from $32.2 million for the year ended December
31, 2004 to $52.5 million for the year ended December 31, 2005, an increase of $20.3
million, or 62.9%. This increase was attributable to two factors: (a) increased materials
consumed in connection with our increased revenues; and (b) a write-off of inventories and
a long-term receivable in the amount of $7.1 million and $390 thousand, respectively, in
the last quarter of 2005. During the fourth quarter of 2005, we adopted a plan to
terminate our legacy product line, close its in-house production facilities and transfer
production activities to its contract manufacturers. Therefore, we estimated the expected
sales from such product line and the expected use of associated inventory, and as a
consequence we wrote off excess inventory. The Company has been utilizing part of the
products related to components which it wrote off in 2001. In 2004 and 2005, approximately
$1.2 million and $954 thousand, respectively, of inventory previously written-off were
used as components for products manufactured in the Companys ordinary course of
production and were sold as finished goods to customers. The sales of these related
manufactured products were reflected in the Companys revenues without additional
cost to the cost of revenues in the period in which the inventory was utilized.

Gross
profit as a percentage of revenues decreased from 41.2% for the year ended December 31,
2004 to 28.9% for the year ended December 31, 2005.

34

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Research
and Development Expenses, Net. Our gross research and development expenses increased
from $9.8 million for the year ended December 31, 2004 to $10.7 million for the year ended
December 31, 2005, an increase of $0.9 million, or 9.6%. The increase in our gross
research and development expenses was attributable primarily to the hiring of additional
personnel as we developed new products and enhanced existing ones. During the year ended
December 31, 2005, we recognized $1.8 million in research and development grants from the
OCS, compared to $2.3 million during the year ended December 31, 2004. Our net research
and development expenses increased from $7.5 million for the year ended December 31, 2004
to $9.0 million for the year ended December 31, 2005, an increase of $1.5 million or
19.8%.

Selling
and Marketing Expenses.Selling and marketing expenses increased from $11.8 million
for the year ended December 31, 2004 to $13.6 million for the year ended December 31,
2005, an increase of $1.8 million, or 15.1%. This increase was attributable primarily to
the hiring of additional personnel and an increase in sales commissions.

General
and Administrative Expenses.General and administrative expenses increased from $2.5
million for the year ended December 31, 2004 to $3.2 million for the year ended December
31, 2005, an increase of $0.7 million, or 28.8%. This increase was attributable primarily
to the overall increase in the scope of our activities.

Financial
Income, Net.Financial income, net decreased from $674 thousand for the year ended
December 31, 2004 to $607 thousand for the year ended December 31, 2005, a decrease of $67
thousand or 10%. This decrease was attributable primarily to a higher level of gains from
exchange rate differences in 2004 as compared with 2005 and to a decrease in interest
income resulting from a decrease in the Companys bank deposits and marketable
securities.

Net
Income. The Company recorded a net loss in 2005 of $3.8 million as compared with net
income in 2004 of $1.6 million, primarily due to a write-off of inventories and a
long-term receivable in the amount of $7.1 million and $390 thousand, respectively, in the
last quarter of 2005.

# Impact of Inflation and
Currency Fluctuations

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. When the rate of inflation in Israel exceeds the rate of
devaluation of the NIS against the dollar, companies experience increases in the dollar
cost of their operations in Israel. 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 rate of
devaluation (or in 2003, 2004 and 2006, appreciation) of the NIS against the dollar:

| | Year ended December 31, | Israeli inflation rate % | NIS devaluation
(appreciation) %
| | ----------------------- | ------------------------ | --------------------------------
|
|
|
|
| | 2002                    |                          |                                 
| | 2003                    |                          |                                 
| | 2004                    |                          |                                 
| | 2005                    |                          |                                 
| | 2006                    |                          |                                 

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. 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.

35

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# 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 on the Nasdaq National Market (now known as Nasdaq Global
Market) in August 2000, we have financed our operations primarily through the proceeds of
that initial public 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.

As
of December 31, 2006, we had approximately $29.5 million in cash and cash equivalents,
short- and long-term bank deposits, and short- and long-term marketable securities.

As
of December 31, 2006, our cash investments are comprised of the following: 34% consist of
short-term, highly liquid investments with original maturities of up to three months, and
41% consist of short-term deposits and marketable securities with original maturities of
up to 1 year, with a minimum credit rating of A1/P1. The remaining balance of our assets
are invested in corporate debt securities and in bank deposits with maturities of up to 3
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 $4.4 million for the year ended
December 31, 2006, $4.3 million for the year ended December 31, 2005 and $1.7 million for
the year ended December 31, 2004. In 2006, our cash used in operating activities was
affected by (i) the net loss, (ii) an increase in trade receivables which was mainly
attributable to an increase in the revenues, (iii) an increase in inventories, which was
partially offset by an increase in trade payables, and (iv) an increase in short- and
long-term payables attributable mainly to termination of OCS grant program. In 2005, our
cash used in operating activities was affected by (i) the net loss, (ii) increase in trade
receivables (which was mainly attributable to an increase in the revenues), partially
offset by an increase in trade payables and a decrease in inventories (mainly attributed
to an inventory write off). In 2004, our cash used in operating activities was affected by
(i) the net income, (ii) an increase in trade receivables and (iii) an increase in
inventories, which was partially offset by an increase in trade payables.

Net
cash provided by investing activities was approximately $2.1 million for the year ended
December 31, 2006, $2.7 million for the year ended December 31, 2005 and $4.2 million for
the year ended December 31, 2004. In 2006, our cash generated from investing activities
resulted from investments in long-term bank deposits and investment in available-for-sale
marketable securities less proceeds and the purchase of property and equipment. In 2005,
our cash generated from investing activities resulted from investments in long-term bank
deposits and investment in available-for-sale marketable securities less proceeds from
maturities of held-to-maturity marketable securities and short-term bank deposits. In
2004, our cash generated from investing activities resulted from investments in long-term
bank deposits and investment in available-for-sale marketable securities less proceeds
from maturities of held-to-maturity marketable securities and short-term bank deposits.

Net
cash provided by financing activities was approximately $2.1 million for the year ended
December 31, 2006, $678 thousand for the year ended December 31, 2005 and $1.5 million for
the year ended December 31, 2005. Our financing activities provided cash as a result of
proceeds from exercises of stock options by employees.

As
of December 31, 2006, our principal commitments consisted of $3.2 million for obligations
outstanding under non-cancelable operating leases and approximately $11.9 million payable
to the OCS according to the termination agreement we entered into with the OCS.

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
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.

36

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# Capital Expenditures

We
have no current material commitments for capital expenditures.

# 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 networks), and to lower the cost of producing both existing and future
products. We believe that our future success will depend upon our ability to maintain
technological leadership, to enhance existing products and to introduce on a timely basis
new commercially viable products and technology addressing the needs of our customers. 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 seek
to 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, 2006, our research, development and engineering staff consisted of 108
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 technical
expertise in these fields results in a highly-optimized system design and a strong and
reliable system solution. Our extensive protocol knowledge and expertise has resulted in
highly-optimized solutions for various communications protocols.

# Intellectual Property

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

# Trend Information

Beginning
in the second half of 2003, the telecommunications industry began to recover from the
downturn it experienced in the previous two years, and has shown signs of moderate growth.
Growth in the cellular market has created demand for high-capacity cellular backhaul
infrastructure. In Europe and the U.S., this demand primarily comes from the buildup of 3G
networks which employ data-rich applications; in developing areas, it results from
increases in the number of subscribers and from the establishment of new networks where
none existed before (referred to as greenfield networks).

At
the same time, we are seeing pressure on our sale prices as a result of several factors:

| |  | the
size of the transaction;
| | - | ----------------------------

| |  | increased
competition;
| | - | ----------------------

| |  | the
geographic location of the customer (e.g.., sale prices tend to be lower in certain parts
of Asia,               especially India); and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
channel through which a sale is made (e.g., the percentage of our sales made through OEMs
grew in 2006).
| | - | ------------------------------------------------------------------------------------------------------------

Although we have reduced the cost of
producing our equipment and are continuing to do so, such price pressure may have a
negative impact on our results of operations. Although our revenues have increased
sequentially quarter by quarter for several years, we cannot be certain that the level of
sequential quarterly revenue growth will continue.

As
we continue to expand our geographic footprint, we are increasingly engaged in supplying
post-delivery services for our customers, often in developing nations. We act as prime
contractor and equipment supplier, providing planning, installation and supervision
services required for network construction projects. 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 products do not pass the acceptance tests, the customer could refuse to
pay us and we would incur substantial costs, including fees owed to our 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.

37

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# Off Balance Sheet
Arrangements

Not
applicable.

# Tabular Disclosure of
Contractual Obligations

|                             | Payments due by period (in thousands of dollars)
|---------------------------- | ------------------------------------------------
|
|
|
|
|Operating Lease Obligations1 |                                                 
|                             |                                                 
|Purchase Obligations2        |                                                 
|                             |                                                 
|Obligation to OCS            |                                                 
|                             |                                                 
|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.
|-- | -------------------------------------------------------------

|3. | Our obligation for accrued severance pay under Israels Severance Pay Law
          as of December 31, 2006 was approximately $4.3 million, of which approximately
          $2.5 million was funded through deposits in severance pay funds, leaving a net
          obligation of approximately $1.8 million.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# 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. See Note 2 to our
Consolidated Financial Statements, which contains additional information regarding our
accounting policies and other disclosures required by U.S. GAAP.

Our
management believes the significant accounting policies which 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; and
| | - | ------------------------------------

| |  | Stock-based
compensation expense.
| | - | ---------------------------------

38

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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 collectibility is probable. 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 with respect to products, we do not recognize
revenues before we have demonstrated that the criteria specified in the acceptance
provisions have been satisfied or that the acceptance provision has lapsed. When we
provide both products and post-delivery installation services which are not essential to
the functionality of the equipment, we defer recognition of the fair value of the
installation services (but not less than the amount contingent upon completion of
installation or acceptance, if any) to the period in which such installation occurs. Our
typical product warranty is between 12 to 36 months at no extra charge. We accrue for
provision for warranty costs based on our historical experience. 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 the criteria described in this paragraph, we decide whether revenue recognition
should be deferred.

Revenue
from certain arrangements includes multiple elements which are sale of products and
post-delivery installation services that are not essential to the functionality of the
equipment, within a single contract. Our accounting policy complies with the requirements
in EITF 00-21 relating to the separation of multiple deliverables into individual
accounting units with determinable fair values. When such arrangements exist, we consider
the sale of equipment and its installation to be two separate accounting units of the
arrangement, since 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. We defer the fair value of the installation services (but
not less than the amount contingent upon completion of installation/acceptance, if any) to
the period in which such installation occurs.

Inventory
valuation. Our inventories are stated at the lower of cost or market value. Cost is
determined by used 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 and
the financial position of 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, our revenues
might be limited and additional allowances might be required. As of December 31, 2006, our
allowance for doubtful accounts was $967,000 and our trade receivables were $27.4 million.
To date, our allowances for doubtful accounts have been sufficient.

Stock-based
compensation expense. On January 1, 2006, we adopted Statement of Financial Accounting
Standards No. 123 (revised 2004), Share-Based Payment (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. SFAS 123(R) supersedes Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (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 Securities and Exchange Commission
issued Staff Accounting Bulletin No. 107 (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 (SFAS 123).

39

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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: (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 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 123(R). Results for prior periods have
not been restated.

We
selected the binomial option pricing model as the most appropriate fair value method for
our stock-options 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 vesting period, net of
estimated forfeitures. Estimated forfeitures are based on actual historical pre-vesting
forfeitures and on managements estimates.

Stock-based
compensation expense recognized under SFAS 123(R) was $1.7 million for the year ended
December 31, 2006.

# Recently Issued
Accounting Standards

In
June 2006, the FASB issued Interpretation 48 (FIN 48), Accounting for
Uncertainty in Income Taxes (FIN 48), an interpretation of FASB
Statement 109, Accounting for Income Taxes. The Interpretation addresses the
determination of whether tax benefits claimed or expected to be claimed on a tax return
should be recorded in the financial statements. Under FIN 48, a company may recognize the
tax benefit from an uncertain tax position only if it is more likely than not that the tax
position will be sustained on examination by the tax authorities, based on the technical
merits of the position. The tax benefits recognized in the financial statements from such
a position should be measured based on the largest benefit that has a greater than fifty
percent likelihood of being realized upon ultimate settlement.

FIN
48 also provides guidance on de-recognition, classification, interest and penalties on
income taxes, accounting in interim periods and requires increased disclosures. FIN 48
applies to all tax positions related to income taxes subject to SFAS 109. This includes
tax positions considered to be routine as well as those with a high degree of
uncertainty. FIN 48 specifically prohibits the use of a valuation allowance as a
substitute for de-recognition of tax positions. The provisions of FIN 48 are effective
beginning January 1, 2007. We are currently assessing the impact that FIN 48 will have on
our consolidated financial statements.

In
September 2006, the SEC issued Staff Accounting Bulletin No. 108, Financial
Statements  Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements (SAB 108). SAB 108
requires companies to quantify the impact of all correcting misstatements, including both
the carryover and reversing effects of prior year misstatements, on the current year
financial statements. SAB 108 is effective for fiscal years ending after November 15,
2006. The adoption of SAB 108 did not have any impact on our consolidated financial
statements.

In
September 2006, the Financial Accounting Standards Board (FASB) issued SFAS
157, Fair Value Measurements (SFAS 157). This Standard defines
fair value, establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements. SFAS 157 is
effective for financial statements issued for fiscal years beginning after November 15,
2007 and interim periods within those fiscal years. We are currently assessing the impact
that SFAS 157 will have on our consolidated financial statements.

In
February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets
and Financial Liabilities (SFAS 159). SFAS 159 permits companies to
choose to measure certain financial instruments and certain other items at fair value. The
Standard requires that unrealized gains and losses on items for which the fair value
option has been elected be reported in earnings. SFAS 159 is effective for financial
statements issued for fiscal years beginning after November 15, 2007 and interim periods
within those fiscal years, although earlier adoption is permitted. We are currently
assessing the impact that SFAS 159 will have on our consolidated financial statements.

40

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|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    | 58  | Chairman of the Board of Directors                     
|Ira Palti        | 49  | President and Chief Executive Officer                  
|Naftali Idan     | 55  | Executive Vice President and Chief Financial Officer   
|Shlomo Tenenberg | 52  | Executive Vice President, Worldwide Marketing and Sales
|Hillik Rave      | 55  | Executive Vice President, Worldwide Operations         
|Sharon Ganot     | 38  | Vice President, Human Resources                        
|Udi Gordon       | 40  | Executive Vice President, Research and Development     
|Norman Kotler    | 55  | General Counsel and Corporate Secretary                
|Joseph Atsmon    | 58  | Director                                               
|Yael Langer      | 42  | Director                                               
|Yair E. Orgler   | 67  | Director                                               
|Avi Patir        | 58  | Director                                               

Zohar
Zisapelhas 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. 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 the 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 in Israel and an M.B.A. from De Paul University in Chicago, and
is a certified public accountant in Israel.

Shlomo
Tenenberghas served as our Executive Vice President, Worldwide Marketing and Sales
since October 2002. From July 1998 until October 2002, he served as our Vice President of
Marketing and Sales. From March 1994 to July 1998, Mr. Tenenberg served as the Vice
President of Nexus Telocation Systems Ltd. From October 1989 until March 1994, Mr.
Tenenberg was the Marketing Manager at ECI Telecom Ltd. Mr. Tenenberg received a B.Sc. in
electrical engineering and electronics from Ben Gurion University and an M.B.A. from Tel
Aviv University.

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.

41

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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, Research and Development since July 2003.
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 from York University (Toronto).

Joseph
Atsmonhas served as a director since July 2001. Mr. Atsmon has also served as a
director of Nice Systems Ltd. since July 2001, of RADVision Ltd. since June 2003 and of
VocalTec Communications Ltd. since December 2005. 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
Langerhas 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 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.

Yair
E. Orgler has served as an external 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., Dead Sea Bromine Company Ltd., Bromine Compounds Ltd. and Itamar Medical 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.

42

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Avi
Patir has served as an external director since March 2007. Mr. Patir is Senior Vice
President for 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, 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
and Satlink Communications. 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.

# 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, 2006. 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 17 persons |                                         |                                               

During
2006, we granted to our directors and senior management options to purchase 262,500
ordinary shares, in the aggregate, range of exercise prices of $3.89 to $5.39 per share.
The options expire 10 years after grant.

Other
than 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
The 2003 Share Option Plan below and Note 9 to our
Consolidated Financial Statements included as Item 18 in this annual report.

# Board Practices

Board
of Directors

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.

The
board may make 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 at the meeting. A quorum of
directors is at least a majority of the directors then in office. The board may elect one
director to serve as the chairman of the board of directors 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. Each of our
external directors, as further described below, serves a three-year term. 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 now
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 a certain class of
directors. The director (other than a director elected to fill a vacancy in accordance
with Article 41 of the Companys 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 2008 annual general meeting and until her successor is
duly elected and qualified. Messrs. Zisapel and Atsmon are currently our Class II
Directors, serving for a term ending at the 2009 annual general meeting of the
shareholders and until their respective successors are duly elected and qualified.

43

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If
any directors are appointed by the board of directors, 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. There is no
requirement that a director own shares of our company. Directors may appoint alternative
directors in their stead.

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 U.S. Securities and
Exchange Commission and the Nasdaq Rules applicable to listed companies, as well as with
the Companies Law applicable to Israeli companies. Under the Nasdaq Rules, a majority of
our directors are required to be independent and, under the Israeli Companies Law, we are
required to appoint two external directors.

Independent
Directors

The
independence standard under the Nasdaq Rules excludes, among others, any person who is a
current or former employee (at any time during the past three years) 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 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; or
| | - | --------------------------------------

| |  | any
entity controlled by the company or by this controlling entity.
| | - | -------------------------------------------------------------------

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 president and
any officer that reports directly to the chief executive officer.

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
(as such terms are defined in regulations promulgated under the Companies Law) and (2) at
least one of the external directors must have accounting and financial
expertise. We have determined that Prof. Orgler has the accounting and
financial expertise required by the Companies Law, and that Mr. Patir has the required
professional qualifications.

44

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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
company may not engage an external director as an office holder and cannot employ or
receive services from that person, 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, 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.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------

The
initial term of an external director is three years and, in a company such as Ceragon, may
be extended for additional three-year terms by the shareholders. External directors can be
removed from office only by the same majority of shareholders that was required to elect
them, or by a court (if they cease to meet the statutory qualifications with respect to
their appointment, or if they violate their duty of loyalty to the company). Each
committee of a companys board of directors is required to include at least one
external director, except for the audit committee, which is required to include all
external directors.

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.
| | - | ------------------------------------------------------------------------------------------------

45

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The
role of the audit committee is to identify irregularities in the management of the
companys business and to examine accounting, reporting, and financial control
practices, in consultation with the internal auditor and the companys independent
accountants, suggest appropriate courses of action to amend such irregularities, and to
exercise the powers of the board of directors with respect to such practices. In addition,
the approval of the 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 under the Companies Law to effect specified
actions and extraordinary transactions with office holders, third parties in which an
office holder has a personal interest and controlling parties, and transactions with a
third party in which a controlling party has a personal interest. A controlling
party is defined in the Companies Law for this purpose 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, 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 with an
interested party or with an office holder 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. 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. Audit committee approval is also required 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 who is not a director of the company. In addition, the audit committee must approve
contracts between the company and any of its directors relating to the service or
employment of the director.

Remuneration
of Directors

Directors
remuneration requires the approval of the audit committee, the board of directors and the
shareholders (in that order) except for reimbursement of reasonable expenses incurred in
connection with carrying out the directors duties.

Neither
the company nor its subsidiaries have entered into any service contracts with its
directors that provide benefits upon termination of employment, except with regard to our
former president and chief executive officer, Shraga Katz, in his capacity as president
and chief executive officer.

Share
Incentive Committee

Our
share incentive committee administers our key employee share incentive plan and our 2003
share option plan. The members of the committee are Messrs. Zisapel and Patir. The board
of directors has delegated to the share incentive committee the authority to grant options
under the 2003 share option plan, provided that such grants are within the framework
determined by the board.

Option
Committee

Our
option committee administers our affiliate employees option plan. The members of the
committee are Messrs. Zisapel and Patir.

Dividends

Dividends
may be paid only out of profits and other surplus, as defined in the Companies Law, as of
the end of the most recent fiscal year or as accrued over a period of two years, whichever
is higher. Our board of directors is authorized to declare dividends, 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, 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 assets or shares,
debentures or debentures stock of our company or of other companies. For further
information, please see Financial Information  Dividends.

46

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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 demand
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. We have appointed Gideon
Duvshani, C.P.A., as our internal auditor.

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 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.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Approval of Specified
Related Party Transactions under Israeli Law

Under
the Companies Law, the approval of the board of directors is required for all compensation
arrangements of office holders who are not directors, and directors compensation
arrangements require the approval of the audit committee, the board of directors and the
shareholders, in that order.

The
company may approve an action by an office holder from which the office holder would
otherwise have to refrain, 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.

47

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| | 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 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.
| | - | -----------------------------------------------------------------------------------------------

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 in which an office holder has a personal interest, 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 shareholder 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. A controlling shareholder includes for
this purpose a shareholder that holds 25% or more of the voting rights in a public company
if no other shareholder owns more than 50% of the voting rights in the company, but
excluding a shareholder whose power derives solely from his or her position as a director
of the company or any other position with the company. Extraordinary transactions with a
controlling shareholder or in which a controlling shareholder has a personal interest, and
the engagement of a controlling shareholder 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,
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.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 shareholder 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.

48

---

---



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;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 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.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our
articles of association also include the following:

| |  | we
are authorized to grant in advance an undertaking to indemnify our office holders,
provided that the undertaking is: limited to specified events which the board of
directors determines to be anticipated; and limited to an amount determined by the board
of directors to be reasonable under the circumstances; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | we
are authorized to indemnify retroactively our office holders.
| | - | ----------------------------------------------------------------

49

---

---



Limitations
on Insurance and Indemnification

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

| |  | a
breach by the office holder of his or her duty of loyalty unless 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;
| | - | ------------------------------------------------------------------------------------------------------------

| |  | 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, indemnification of, and procurement of insurance
coverage for, our office holders must be approved by our audit committee and our board of
directors and, in specified circumstances, by our shareholders.

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. For purposes of the shareholder vote
of each party, unless a court rules otherwise, 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. 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 have been 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.

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
25% or greater shareholder of the company. This rule does not apply if there is already
another 25% or greater shareholder of 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 45% or greater shareholder
of the company, unless there is already a 45% or greater shareholder of the company. These
requirements do not apply if, in general, the acquisition (1) was made in a private
placement that received shareholder approval, (2) was from a 25% or greater shareholder of
the company which resulted in the acquirer becoming a 25% or greater shareholder of the
company, or (3) was from a 45% or greater shareholder of the company which resulted in the
acquirer becoming a 45% or greater shareholder of 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.

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 it. The Companies Law provides for appraisal rights if any shareholder
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.

50

---

---



Israel
tax law treats stock-for-stock 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
stock-for-stock swap.

# Employees

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 have employment agreements with all of our employees.

As
of December 31, 2005, we had 276 employees worldwide, of whom 105 were employed in
research and development, 97 in sales and marketing, 28 in management and administration
and 46 in operations. Of these employees, 217 were based in Israel, 17 were based in the
United States, 11 were based in Europe, 9 were based in Latin America and 22 were based in
Asia-Pacific.

As
of December 31, 2004, we had 260 employees worldwide, of whom 94 were employed in research
and development, 74 in sales and marketing, 18 in management and administration and 74 in
operations. Of these employees, 217 were based in Israel, 14 were based in the United
States, 10 were based in Europe, 5 were based in Latin America and 14 were based in
Asia-Pacific.

We
are subject to Israeli labor laws and regulations with respect to our Israeli employees.
These laws principally concern matters such as paid annual vacation, paid sick days,
length of the workday and work week, minimum wages, pay for overtime, insurance for
work-related accidents, severance pay and other conditions of employment.

Furthermore,
we and our Israeli employees are subject to provisions of the 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 order of the Israeli Ministry of Labor and Welfare. These provisions principally
concern cost of living increases, recreation pay and other conditions of employment. We
provide our employees with benefits and working conditions above the required minimums.
Our employees are not represented by a labor union. We consider our relationship with our
employees to be good. To date, we have not experienced any work stoppages.

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 31, 2007. The
percentage of outstanding ordinary shares is based on 27,851,229 ordinary shares
outstanding as of March 31, 2007.

51

---

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|Name                                    | Number of Ordinary Shares | Percentage of
Outstanding
Ordinary Shares | Number of Stock Options
Held (1) | Range of exercise
prices per share of
stock options
|--------------------------------------- | ------------------------- | ----------------------------------------- | -------------------------------- | ---------------------------------------------------
|
|
|
|
|Zohar Zisapel                           |                           |                                           |                                  | 3,080,220                                          
|Ira Palti                               |                           |                                           |                                  | 0                                                  
|All directors and senior management     |                           |                                          
|as a group, consisting of 12 people (2) |                           |                                           |                                  | 3,085,072                                          

|(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 31, 2007 (including options held by each such
person and which are                     vested or shall become vested within 60 days of
March 31, 2007) and have                     therefore not been separately disclosed.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Stock Option Plans

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 are eligible to
participate in the plan. The share incentive committee of our board of directors
administers the plan. No options may be granted to any person serving on the share
incentive committeeor to any person who is or will become as a result of an option
grant one of our controlling shareholders. The options expire five to ten years from the
date of issuance. The following table presents option grant information for this plan as
of May 31, 2007:

|Ordinary shares reserved
for option grants | Options outstanding | Weighted average
exercise price
|------------------------------------------ | ------------------- | -------------------------------
|
|
|
|
|588,650                                    | 588,650             | $  6.38                        

Affiliate
Employees Option Plan

In
May 1997, we adopted our affiliate employees option 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.  This plan has terms
that are substantially identical to the terms of the key employee share incentive plan.
 The option committee of our board of directors administers the plan.  Our employees,
directors and consultants are eligible to participate in the plan.  No options may be
granted to any person serving on the option committee or to any person who is or will
become as a result of an option grant one of our controlling shareholders.  The options
expire five to ten years from the date of issuance. The following table presents option
grant information for this plan as of May 31, 2007:

|Ordinary shares reserved
for option grants | Options outstanding | Weighted average
exercise price
|------------------------------------------ | ------------------- | -------------------------------
|
|
|
|
|656,001                                    | 656,001             | $  4.76                        

52

---

---



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 key employee share incentive plan and the affiliate options 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 stock options.  It is also intended to be a qualified plan as defined by the U.S.
Tax Code. Our worldwide employees, directors and consultants are eligible to participate
in this plan.  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
May 31, 2007.

|Cumulative Ordinary Shares Reserved for
Option Grants | Remaining Reserved Shares
Available for Option Grants | Options Outstanding | Weighted Average Exercise Price
|----------------------------------------------------- | ----------------------------------------------------- | ------------------- | -------------------------------
|
|
|
|
|11,728,537                                            | 154,313                                               | 4,041,533           | $     4.76                     

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:

|                                | Options Outstanding | Unvested Options
|------------------------------- | ------------------- | ----------------
|
|
|
|
|Directors and senior management | 1,746,875           | 1,161,125       
|                               
|All other grantees              | 3,539,309           | 1,368,674       

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 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 31, 2007 (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.

Unless
otherwise noted below, each shareholders address is 24 Raoul Wallenberg St., Tel
Aviv 69719, Israel.

53

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|Name                                                                         | Number of Ordinary Shares | Percentage of
Outstanding
Ordinary Shares1
|---------------------------------------------------------------------------- | ------------------------- | ------------------------------------------
|
|
|
|
|Zohar Zisapel (2)                                                            |                           |                                           
|Yehuda Zisapel (2)                                                           |                           |                                           
|HarbourVest International Private Equity Partners III - Direct Fund, L.P.(3) |                           |                                           

|(1) | Based
on 27,851,229 ordinary shares issued and outstanding as of March 31, 2007.
|--- | --------------------------------------------------------------------------------

|(2) | Yehuda
Zisapel and Zohar Zisapel are brothers.
|--- | ----------------------------------------------

|(3) | The
sole general partner of HarbourVest International Private Equity Partners
                    III-Direct Fund, L.P. is HIPEP III-Direct Associates L.L.C., the
managing member                     of which is HarbourVest Partners, LLC. The address of
HarbourVest is One                     Financial Center, Boston, Massachusetts 02111,
U.S.A. The members of HIPEP III                     Direct Associates L.L.C. and
HarbourVest Partners LLC may be deemed to have an                     indirect pecuniary
interest (within the meaning of Rule 16a-1 under the Exchange                     Act) in
an indeterminate portion of the shares beneficially owned by HarbourVest
                    International Private Equity Partners III-Direct Fund, L.P. Such
members                     disclaim beneficial ownership of these shares within the
meaning of Rule 13d-3                     of the Exchange Act.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As of June 11, 2007, approximately
82% of our ordinary shares were held in the United States and there were 48 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 81%
of our outstanding ordinary shares as of said date).

# Related Party
Transactions

The RAD-BYNET Group of
Companies

Yehuda
Zisapel is a principal shareholder and Zohar Zisapel is Chairman of our board of directors
and a principal shareholder of our company. They are brothers who do not vote as a group
and do not have a voting agreement who, as of March 31, 2007, together control 22.3% of
our company. Individually or together, they are also founders, directors and 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 and pharmaceutical companies:

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

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

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.

54

---

---



Members
of the RAD-BYNET group provide us on an as-needed basis with legal, management information
systems, marketing, and administrative services, and we reimburse each company for its
costs in providing these services. The aggregate amount of these expenses was
approximately $246 thousand in 2006.

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 49,000 square feet in size.
The lease for this facility is valid until May 2008. 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 4,100 square feet in size. The lease for
this facility is valid until September 2008. The aggregate amount of rent and maintenance
expenses related to these properties was approximately $400 thousand in 2006.

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 $3.0 million for the
year ended December 31, 2006.

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 14,581,500 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 shareholder groups had the right to make a single demand for
the registration of their ordinary shares outstanding at the time of the initial public
offering. The last expiry of these demand registration rights occurred during 2005. In
addition, each of these shareholder groups 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.

55

---

---



# Export Sales

In
2007, 97% 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.

56

---

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

# Offer and Listing Details

Our
ordinary shares have been listed on the Nasdaq Global Market 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 prices of our ordinary
shares as reported on Nasdaq.

|                                | Ordinary Shares
|------------------------------- | ---------------
|
|
|
|
|2002 (Annual)                   |                
|                                |                
|2003 (Annual)                   |                
|                                |                
|2004 (Annual)                   |                
|                                |                
|2005 (Annual)                   |                
|                                |                
|2006 (Annual)                   |                
|                                |                
|2005                            |                
|First Quarter                   |                
|Second Quarter                  |                
|Third Quarter                   |                
|Fourth Quarter                  |                
|                                |                
|2006                            |                
|First Quarter                   |                
|Second Quarter                  |                
|Third Quarter                   |                
|Fourth Quarter                  |                
|                                |                
|2007                            |                
|First Quarter                   |                
|Second Quarter (through May 31) |                

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
|------------- | ---- | ---
|
|
|
|
|December 2006 |      |    
|January 2007  |      |    
|February 2007 |      |    
|March 2007    |      |    
|April 2007    |      |    
|May 2007      |      |    

57

---

---



The
table below sets forth for the periods indicated the high and low market prices for our
ordinary shares on the TASE from the inception of trading in September 2004. 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
|------------------------------- | ---- | ---
|
|
|
|
|2004 (4 months)                 |      |    
|                                |      |    
|2005 (Annual)                   |      |    
|                                |      |    
|2006 (Annual)                   |      |    
|                                |      |    
|2005                            |      |    
|First Quarter                   |      |    
|Second Quarter                  |      |    
|Third Quarter                   |      |    
|Fourth Quarter                  |      |    
|                                |      |    
|2006                            |      |    
|First Quarter                   |      |    
|Second Quarter                  |      |    
|Third Quarter                   |      |    
|Fourth Quarter                  |      |    
|                                |      |    
|2007                            |      |    
|First Quarter                   |      |    
|Second Quarter (through May 31) |      |    

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
|------------- | ---- | ---
|
|
|
|
|December 2006 |      |    
|January 2007  |      |    
|February 2007 |      |    
|March 2007    |      |    
|April 2007    |      |    
|May 2007      |      |    

# 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
Securities and Exchange Commission on August 3, 2000, and is incorporated herein by
reference. The articles of association as amended in November 2006 are included as Exhibit
1.2 to this annual report.

# Material Contracts

None.

58

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# 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.

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.

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.

59

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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%                                                                      

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;
| | - | -------------------------------------------------------

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| |  | 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 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.
| | - | -------------------------------------------------------

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.

61

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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 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.

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.

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; however, special rules will
apply if we are a United States-owned foreign corporation. In that case,
distributions of current or accumulated earnings and profits will be treated as U.S.
source and non-U.S. source income in proportion to our earnings and profits in the year of
the distribution allocable to U.S. and non-U.S. sources. We will be treated as a United
States-owned foreign corporation as long as stock representing 50% or more of the voting
power or value of our ordinary shares is owned, directly or indirectly, by United States
persons. Non-U.S. taxes allocable to the portion of our distributions treated as from U.S.
sources under these rules may not be creditable against a U.S. holders U.S. federal
income tax liability on such portion.

62

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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. A disposition of ordinary shares will be considered to occur on the trade
date, regardless of the U.S. holders method of accounting. 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 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, 2006. 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 2006, U.S. holders who acquired our
ordinary shares in 2006 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, which are relevant to this determination.

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.

63

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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. 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. 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.

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.

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 National
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 National Market. 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).

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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 2006 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:

| |  | 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.

|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.

65

---

---



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, 2006, a 10% strengthening of the U.S. dollar versus other
currencies would have resulted in an increase of $0.1 million in our net assets position,
while a 10% weakening of the dollar versus all other currencies would have resulted in a
decrease of $0.1 million.

The
counter-parties to our hedging transactions are major financial institutions with high
credit ratings. As of December 31, 2006, we had forward contracts to sell up to $7.9
million for a total amount of approximately NIS 33.5 million (that would mature on or
before March 31, 2007), and forward contracts to sell up to 3.5 million for a total
of approximately $4.6 million (that would mature on March 31, 2007). During the year ended
December 31, 2006 we recognized a loss of $264,000 as a result of these 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 November 2006, our shareholders approved
amendments to our Articles of Association, as follows:

| |  | Article
39 was amended by adding new subsection (f) to allow the term of a director (external or
otherwise) to commence following the election of such director by shareholder resolution;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Articles
20 (record date for general meetings), 25 (notice of general meetings), 33 (form of
proxy), 34 (effect of death of appointor) and 69 (notices) were amended to take into
account new regulations promulgated under the Israeli Companies Law concerning notice of
general meetings and shareholder proxies and to simplify the Companys compliance
with them;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Articles
39(d) (election of directors), 43 (remuneration of directors) and 52 (deletion of
requirement that shareholders approve the final dividend) were amended to take account of
changes in the Israeli Companies Law and to make other minor corrections and changes
associated therewith.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

These amendments were described in
Item 1 of our Notice and Proxy Statement for the Annual General Meeting of our
shareholders held on November 23, 2006, included in our report on Form 6-K, furnished to
the SEC on October 19, 2006, which is incorporated herein by reference. The articles of
association as amended in November 2006 are included as Exhibit 1.2 to this annual report.

66

---

---



# Use of Proceeds

As
of December 31, 2006, approximately 75% of the net offering proceeds remaining from our
initial public offering was invested in short-term investments. The 25% balance of the net
offering proceeds was invested in long-term investments. During fiscal year 2006, we used
the proceeds for capital expenditures and general corporate purposes.

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

(a)
          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)
          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, 2006
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)
          This Annual Report does not include an attestation report of our registered
          public accounting firm regarding internal control over financial reporting.
          Managements report was not subject to attestation by our registered
public           accounting firm pursuant to temporary rules of the SEC that permit us to
provide           only managements report in this Annual Report.

|(d)
          There were no changes in the Companys internal control over financial
          reporting that occurred during the year ended December 31, 2006 that have
          materially affected, or are reasonably likely to materially affect, our
internal           control over financial reporting.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

67

---

---



|ITEM16A. | 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. 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
Auditors

The
following table sets forth, for each of the years indicated, the fees billed by our
independent auditors 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.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Audit-related
fees relate to assurance and associated services that traditionally are performed by the
         independent auditor, 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.

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

Not Applicable.

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

Not Applicable.

68

---

---



# 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-35 hereof.

|                                                                                           |     
|------------------------------------------------------------------------------------------ | ----
|
|
|
|
|Index to Consolidated Financial Statements                                                 | PAGE
|Report of Independent Registered Public Accounting Firm                                    | F-2 
|Consolidated Balance Sheets at December 31, 2006 and 2005                                  | F-3 
|Consolidated Statements of Operations for the Years Ended December 31, 2006, 2005 and 2004 | F-5 
|Statements of Changes in Shareholders' Equity for the Years Ended December 31,            
|2006, 2005 and 2004                                                                        | F-6 
|Consolidated Statements of Cash Flows for the Years Ended December 31, 2006, 2005 and 2004 | F-7 
|Notes to Consolidated Financial Statements                                                 | F-8 

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

|1.1 |  | Memorandum
of Association (English translation accompanied by Hebrew original)*
|--- |  | -------------------------------------------------------------------------------

|1.2 |  | Articles
of Association, as amended November 23, 2006
|--- |  | -----------------------------------------------------

|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 exhibit 3.1 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.

** 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.

69

---

---

# SIGNATURE

The
registrant hereby certifies that it meets all of the requirements for filing on Form 20-F
and that is 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: June 29, 2007



---

---

# CERAGON NETWORKS LTD.
AND ITS SUBSIDIARIES

# CONSOLIDATED FINANCIAL
STATEMENTS

# AS OF DECEMBER 31, 2006

# IN U.S. DOLLARS

# INDEX

|                                                        | Page      
|------------------------------------------------------- | ----------
|
|
|
|
|Report of Independent Registered Public Accounting Firm | F-2       
|Consolidated Balance Sheets                             | F-3 - F-4 
|Consolidated Statements of Operations                   | F-5       
|Statements of Changes in Shareholders' Equity           | F-6       
|Consolidated Statements of Cash Flows                   | F-7       
|Notes to Consolidated Financial Statements              | F-8 - F-30



---

---



# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

# To the Shareholders of

# CERAGON NETWORKS LTD.

We
have audited the accompanying consolidated balance sheets of Ceragon Networks Ltd.
(the Company) and its subsidiaries as of December 31, 2005 and 2006, 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, 2006. These
financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these 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. We were not engaged to perform an audit of the Companys
internal control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purposes of expressing an opinion on the
effectiveness of the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements
assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present fairly, in
all material respects, the consolidated financial position of the Company and its
subsidiaries as of December 31, 2005 and 2006, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended December
31, 2006, in conformity with United States generally accepted accounting principles.

As
discussed in Note 2q to the consolidated financial statements, effective January 1, 2006,
the Company adopted Statement Financial Standard No. 123 (revised 2004), Share-Based
Payment.

|Tel-Aviv, Israel 
June 27, 2007 | KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global
|------------------------------- | -------------------------------------------------------------

F - 2

---

---



|CERAGON NETWORKS LTD. AND ITS 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 $ 518 |  |             
|and $ 842 at December 31, 2005 and 2006, respectively)             |  |             
|Other accounts receivable and prepaid expenses                     |  |             
|Inventories                                                        |  |             
|                                                                   |  |             
|                                                                   |  |             
|Total current assets                                               |  |             
|                                                                   |  |             
|                                                                   |  |             
|LONG-TERM ASSETS:                                                  |  |             
|Long-term bank deposits                                            |  |             
|Long-term marketable securities                                    |  |             
|Severance pay fund                                                 |  |             
|                                                                   |  |             
|                                                                   |  |             
|Total long-term assets                                             |  |             
|                                                                   |  |             
|                                                                   |  |             
|PROPERTY AND EQUIPMENT, NET                                        |  |             
|                                                                   |  |             
|                                                                   |  |             
|Total assets                                                       |  |             
|                                                                   |  |             

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

F - 3

---

---



|CERAGON NETWORKS LTD. AND ITS 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: 40,000,000 shares at December 31, 2005 and
      2006; Issued and outstanding: 26,335,003 and 27,436,090
      shares at December 31, 2005 and 2006, respectively |  |             
|Additional paid-in capital                                                                                                                                                    |  |             
|Deferred stock compensation                                                                                                                                                   |  |             
|Accumulated other comprehensive income                                                                                                                                        |  |             
|Accumulated deficit                                                                                                                                                           |  |             
|                                                                                                                                                                              |  |             
|                                                                                                                                                                              |  |             
|Total shareholders' equity                                                                                                                                                    |  |             
|                                                                                                                                                                              |  |             
|                                                                                                                                                                              |  |             
|Total liabilities and shareholders' equity                                                                                                                                    |  |             
|                                                                                                                                                                              |  |             

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

|June 27, 2007
Date of approval of thefinancial statements | /s/ Naftali Idan
Naftali IdanExecutive Vice President and Chief Financial Officer | /s/ Ira Palti
Ira PaltiPresident and Chief Executive Officer
|----------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------

F - 4

---

---



|CERAGON NETWORKS LTD. AND ITS 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                               |  |                        
|                                                         |  |                        
|                                                         |  |                        
|Total operating expenses                                 |  |                        
|                                                         |  |                        
|                                                         |  |                        
|Operating income (loss)                                  |  |                        
|Financial income, net                                    |  |                        
|Other income                                             |  |                        
|                                                         |  |                        
|                                                         |  |                        
|Net income (loss)                                        |  |                        
|                                                         |  |                        
|                                                         |  |                        
|Net earnings (loss) per share:                           |  |                        
|Basic and diluted net earnings (loss) per Ordinary share |  |                        
|                                                         |  |                        

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

F - 5

---

---



|CERAGON NETWORKS LTD. AND ITS 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 | Deferred
stock
compensation | Accumulated
other
comprehensive
income | Accumulated
deficit | Total other
comprehensive
income (loss) | Total
shareholders'
equity
|-------------------------------------------------------------------------- | ---------------- | ------------- | -------------------------- | --------------------------- | -------------------------------------- | ------------------- | --------------------------------------- | --------------------------
|
|
|
|
|Balance as of January 1, 2004                                              |                  |               |                            | 24,675,313                  |                                        | $                   | 61                                      |                           
|                                                                           |                  |              
|Exercise of stock options                                                  |                  |               |                            | 1,178,108                   |                                        |                     | 3                                       |                           
|Deferred stock compensation                                                |                  |               |                            | -                           |                                        |                     | -                                       |                           
|Reversal of deferred stock compensation 
    related to forfeited options  |                  |               |                            | -                           |                                        |                     | -                                       |                           
|Amortization of deferred stock     compensation                            |                  |               |                            | -                           |                                        |                     | -                                       |                           
|Comprehensive income:                                                      |                  |              
|Income tax benefit derived from exercise 
    of employee stock options *) |                  |               |                            | -                           |                                        |                     | -                                       |                           
|Unrealized gain from hedging activities                                    |                  |               |                            | -                           |                                        |                     | -                                       |                           
|Net income                                                                 |                  |               |                            | -                           |                                        |                     | -                                       |                           
|                                                                           |                  |               |                            |                             |                                        |                     |                                         |                           
|Total comprehensive income                                                 |                  |               |                            |                             |                                        |                     |                                         |                           
|                                                                           |                  |               |                            |                             |                                        |                     |                                         |                           
|Balance as of December 31, 2004                                            |                  |               |                            | 25,853,421                  |                                        |                     | 64                                      |                           
|                                                                           |                  |              
|Exercise of stock options                                                  |                  |               |                            | 481,582                     |                                        |                     | 1                                       |                           
|Amortization of stock compensation     related to accelerated options      |                  |               |                            | -                           |                                        |                     | -                                       |                           
|Amortization of deferred stock     compensation                            |                  |               |                            | -                           |                                        |                     | -                                       |                           
|Comprehensive loss:                                                        |                  |              
|Income tax benefit derived from exercise 
    of employee stock options *) |                  |               |                            | -                           |                                        |                     | -                                       |                           
|Unrealized loss from hedging activities                                    |                  |               |                            | -                           |                                        |                     | -                                       |                           
|Net loss                                                                   |                  |               |                            | -                           |                                        |                     | -                                       |                           
|                                                                           |                  |               |                            |                             |                                        |                     |                                         |                           
|Total comprehensive loss                                                   |                  |               |                            |                             |                                        |                     |                                         |                           
|                                                                           |                  |               |                            |                             |                                        |                     |                                         |                           
|Balance as of December 31, 2005                                            |                  |               |                            | 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                                           |                  |               |                            | -                           |                                        |                     | -                                       |                           
|Comprehensive loss:                                                        |                  |              
|Income tax benefit derived from exercise 
    of employee stock options *) |                  |               |                            | -                           |                                        |                     | -                                       |                           
|Unrealized loss from hedging activities                                    |                  |               |                            | -                           |                                        |                     | -                                       |                           
|Net loss                                                                   |                  |               |                            | -                           |                                        |                     | -                                       |                           
|                                                                           |                  |               |                            |                             |                                        |                     |                                         |                           
|Total comprehensive loss                                                   |                  |               |                            |                             |                                        |                     |                                         |                           
|                                                                           |                  |               |                            |                             |                                        |                     |                                         |                           
|Balance as of December 31, 2006                                            |                  |               |                            | 27,436,090                  |                                        | $                   | 68                                      |                           
|                                                                           |                  |               |                            |                             |                                        |                     |                                         |                           

|*) | The
income tax benefit for the years ended  December  31, 2004,  2005 and 2006 was $ 1,784,
 $ 168 and $        524, respectively, for which a full valuation allowance was provided
(see also Note 10e).
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

F - 6

---

---



|CERAGON NETWORKS LTD. AND ITS 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                                           |                        
|Decrease (increase) in accrued interest on bank deposits             |                        
|Interest accrued and amortization of premium on held-to-maturity     |                        
|marketable securities                                                |                        
|Increase in trade receivables, net                                   |                        
|Increase in other accounts receivable and prepaid expenses           |                        
|Decrease (increase) in inventories                                   |                        
|Decrease (increase) in long-term receivables                         |                        
|Increase in trade payables                                           |                        
|Increase in deferred revenues                                        |                        
|Increase in other accounts payable and accrued expenses              |                        
|Increase 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                         |                        
|Short-term bank deposits, net                                        |                        
|Investment in long-term bank deposits                                |                        
|Investment in held-to-maturity marketable securities                 |                        
|Proceeds from maturities of held-to-maturity marketable securities   |                        
|                                                                     |                        
|                                                                     |                        
|Net cash provided by investing activities                            |                        
|                                                                     |                        
|                                                                     |                        
|Cash flows from financing activities:                                |                        
|                                                                     |                        
|Proceeds from exercise of stock options                              |                        
|                                                                     |                        
|                                                                     |                        
|Net cash provided by 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                     |                        
|                                                                     |                        

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

F - 7

---

---



|CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES                 
|-----------------------------------------------------------
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|NOTE 1: |  | GENERAL
|------- | - | -------

| | Ceragon
Networks Ltd. (the Company) designs, develops, manufactures and sells
high-capacity wireless backhaul solutions for cellular operators, fixed operators and
private networks and enterprises. The Company sells its products through a direct sales
force, systems integrators, distributors and original equipment manufacturers.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company has nine wholly-owned subsidiaries in Brazil, France, Hong Kong, 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 certain of its subsidiaries operate, the dollar is their 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------

| | 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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 8

---

---



|CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES                 
|-----------------------------------------------------------
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|NOTE 2: |  | SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | 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
4.25%. 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 4.30%. The long-term bank
deposits are presented at their cost, including accrued interest.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | g. | Marketable
securities:
| | -- | ----------------------

| | The Company
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, 2005 and 2006, all securities covered by SFAS 115 were
designated by the Companys management as held-to-maturity.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------

| | Amortization
of premium and accretion of discounts, as well as interest and impairment of value judged
to be other than temporary, are included in financial income, net.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | h. | Inventories:
| | -- | ------------

| | Inventories
are stated at the lower of cost or market value.
| | ------------------------------------------------------------

| | Cost
is determined as follows:
| | ------------------------------

| | Raw materials |  | using the moving average cost method plus indirect costs.
| | ------------- | - | ---------------------------------------------------------

| | Work in progress |  | using the moving average cost method plus indirect costs.
| | ---------------- | - | ---------------------------------------------------------

| | Finished goods |  | using the moving average cost method plus indirect costs.
| | -------------- | - | ---------------------------------------------------------

F - 9

---

---



|CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES                 
|-----------------------------------------------------------
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|NOTE 2: |  | SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | The
Company periodically assesses its inventory and writes down the value of inventory to
cover risks arising from technological obsolescence or excess inventory.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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                            | By the shorter of the term of the
| |                                                   | lease or the 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 2004, 2005 and 2006, no
impairment losses have been identified.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 10

---

---



|CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES                 
|-----------------------------------------------------------
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|NOTE 2: |  | SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | l. | Revenue
recognition:
| | -- | --------------------

| | The
Company and its subsidiaries generate their revenues from selling their 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 with respect to products,
revenue is not recognized before the Company has demonstrated that the criteria specified
in the acceptance provisions have been satisfied, or that the acceptance provision has
lapsed.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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, within a single contract. 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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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. 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Fair
value for installation of the Companys products is determined based on available
third-party evidence which is determined by using the price third-parties charge the
Company.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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.
| | ---------------------------------------------------------------------------------------------------------------

F - 11

---

---



|CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES                 
|-----------------------------------------------------------
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|NOTE 2: |  | SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | 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 is entitled to such grants, on the basis
of the costs incurred and included as a reduction in research and development costs. Such
grants are recorded as a reduction in research and development costs since when received
it is not probable that the grants will be repaid (see also Notes 7 and 8).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o. | Derivative
instruments:
| | -- | -----------------------

| | The
Company has instituted a foreign currency cash flow hedging program using foreign
currency forward and options (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 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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) and
reclassified into earnings in the same period or periods during which the hedged
transaction affects 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. These
forward exchange contracts 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 a gain (loss) from derivative instruments of $ 204, $ (28) and $ (264)
during the years ended December 31, 2004, 2005 and 2006, respectively, which have been
recorded in the statement of operations.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
balance in accumulated other comprehensive income related to derivative instruments as of
December 31, 2006 is expected to be recognized in the statement of operations over the
next three 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 12

---

---



|CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES                 
|-----------------------------------------------------------
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|NOTE 2: |  | SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | 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. Management believes that the financial
institutions that hold the Companys investments are financially sound and,
accordingly, minimal credit risk exists with respect to these investments.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
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
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Changes
in the Groups allowance for doubtful accounts are as follows:
| | ----------------------------------------------------------------------

| |                                 | Allowance for
doubtful
accounts
| | ------------------------------- | -------------------------------
|
|
|
|
| | Balance as of January 1, 2004   |                                
| | Provision, net of recoveries    |                                
| | Write-off                       |                                
| |                                 |                                
| |                                 |                                
| | Balance as of December 31, 2004 |                                
| | Provision, net of recoveries    |                                
| | Write-off                       |                                
| |                                 |                                
| |                                 |                                
| | Balance as of December 31, 2005 |                                
| | Provision, net of recoveries    |                                
| | Write-off                       |                                
| |                                 |                                
| |                                 |                                
| | Balance as of December 31, 2006 |                                
| |                                 |                                

| | The
Companys marketable securities include securities issued by U.S government and
agencies and debentures of corporations. Corporate debentures are those of corporations with
investment-grade ratings, and credit exposure to any given corporation is limited.
Management believes that the financial institutions that hold the Companys
investments are financially sound and that the portfolio is well diversified and,
accordingly, minimal credit risk exists with respect to these marketable securities.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the years ended December 31, 2004 and 2005, the Company entered into transactions for the
sale of trade receivables and promissory notes to Israeli financial institutions (control
and risk were fully transferred) in a total amount of $ 7,506 and $ 2,552, respectively
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 - 13

---

---



|CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES                 
|-----------------------------------------------------------
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|NOTE 2: |  | SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | As
of December 31, 2004 and 2005, the remaining balance of these sale transactions was $
6,677 and $ 265, respectively. These transactions included a recourse provision (which
did not violate the legal isolation and control criteria) and represents an
off-balance-sheet credit risk to the Company.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | q. | 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 year
ended December 31, 2006, 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result of adopting SFAS No. 123(R) on January 1, 2006, the Companys net loss for
the year ended December 31, 2006, is $ 1,712 higher, than if it had continued to account
for share-based compensation under APB 25. Basic and diluted net loss per share for the
year ended December 31, 2006, are $ 0.06 higher, than if the Company had continued to
account for share based compensation under APB 25.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 income statements. Prior to the
adoption of SFAS No. 123(R), the Company accounted for equity-based awards to employees
and directors using the intrinsic value method in accordance with APB No. 25 as allowed
under Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS No. 123) and recognized compensation
expenses, over the requisite service period of each of the awards. Forfeitures were
accounted for as occurred.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
pro-forma table below reflects the Companys stock-based compensation expense, net
income (loss) and basic and diluted net earnings (loss) per share for the years ended
December 31, 2004 and 2005, had the Company applied fair value recognition provision of
SFAS 123, as follows:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 14

---

---



|CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES                 
|-----------------------------------------------------------
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|NOTE 2: |  | SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| |                                                                                                      | Year ended December 31,
| | ---------------------------------------------------------------------------------------------------- | -----------------------
|
|
|
|
| | Net income (loss) as reported                                                                        |                        
| | Add: stock-based compensation expenses included in the   reported net income (loss) under APB 25     |                        
| | Deduct: stock-based compensation expenses determined 
  under fair value based method for all awards |                        
| |                                                                                                      |                        
| |                                                                                                      |                        
| | Pro forma net loss                                                                                   |                        
| |                                                                                                      |                        
| |                                                                                                      |                        
| | Net earnings (loss) per share -                                                                      |                        
| |                                                                                                      |                        
| | Basic and diluted net loss per share - pro forma                                                     |                        
| |                                                                                                      |                        
| |                                                                                                      |                        
| | Basic and diluted net earnings (loss) per share- as reported                                         |                        
| |                                                                                                      |                        

| | In
2004, the fair value for these options was estimated at the date of grant using the
Black-Scholes option pricing model based on the following weighted-average assumptions:
Expected dividend yield of 0%, expected volatility of 53.4%, risk-free interest rate of
3.36% and expected life of 2.5 years.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Beginning January 1, 2005, the
Company adopted the Binomial Model for options granted thereafter, with the following
weighted-average assumptions for 2005: risk-free interest rates of 3.36%-5.13% which is
based on the yield from U.S. Treasury zero-coupon bonds with an equivalent term; dividend
yield of 0%, volatility of price of the Companys shares of 36.06%-61.73% based upon
actual historical stock price movements over the most recent periods ending on the date of
grant equal to the expected option term, and early exercise multiples of 2.36 and 3.10 in
2005 based on actual historical data. Based on the assumptions used, the weighted average
expected term of the stock options granted in 2005 is 5 years.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company estimates the fair value of stock options granted under SFAS No. 123R using the
Binominal model with the following weighted-average assumptions for 2006: risk-free
interest rates of 4.28%-5.41% which is based on the yield from U.S. Treasury zero-coupon
bonds with an equivalent term; dividend yield of 0%, volatility of price of the Companys
shares of 35.07%-53.19% based upon actual historical stock price movements over the most
recent periods ending on the date of grant equal to the expected option term and early
exercise multiples of 2.36 and 3.10 in 2006 based on actual historical data. Based on the
assumptions used, the weighted average expected term of the stock options granted in 2006
is 5.2 years.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company believes that the Binomial method of stock-based valuation is preferable, as it
takes into account the use of dynamic assumptions and is more likely to produce a better
estimate of fair value.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company recognizes compensation expense based on 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 - 15

---

---



|CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES                 
|-----------------------------------------------------------
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|NOTE 2: |  | SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | The
total equity-based compensation expense related to all of the Companys equity-based
awards, recognized for the year ended December 31, 2006, was comprised as follows:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                                                           | Year ended
December 31,
2006
| | ----------------------------------------------------------------------------------------- | ----------------------------
|
|
|
|
| | Cost of revenues                                                                          |                             
| | Research and development, net                                                             |                             
| | Selling and marketing                                                                     |                             
| | General and administrative                                                                |                             
| |                                                                                           |                             
| |                                                                                           |                             
| | Total stock-based compensation expenses                                                   |                             
| |                                                                                           |                             
| |                                                                                           |                             
| | Effect of stock-based compensation expenses, on basic and diluted loss per Ordinary share |                             
| |                                                                                           |                             

| | r. | 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Severance
expense for the years ended December 31, 2004, 2005 and 2006, amounted to approximately $
771, $ 824 and $ 1,281, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------

| | s. | 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 16

---

---



|CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES                 
|-----------------------------------------------------------
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|NOTE 2: |  | SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | 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 and does not differ
significantly from the carrying amount.
| | ------------------------------------------------------------------------------------------------------------------------------------

| | t. | Comprehensive
income (loss):
| | -- | ----------------------------

| | The
Company accounts for comprehensive income (loss) under the provisions of SFAS No. 130,
Reporting Comprehensive Income, which established standards for the reporting
and display of comprehensive income (loss) and its components. Comprehensive income
(loss) represents the change in shareholders equity during a period from
transactions and other events and circumstances from non-owner sources. It includes all
changes in equity except those resulting from investments by owners and distributions to
owners.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | u. | Warranty
costs:
| | -- | ---------------

| | The
Company generally offers a warranty period of 12 to 36 months for its products and
provides a standard limited warranty, including parts and labor. 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 for the years ended December 31, 2004, 2005 and
2006 were approximately $ 308, $ 267 and $ 352, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | v. | 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 1,346,106, 4,514,433 and 3,364,631 for the years ended December 31, 2004, 2005
and 2006, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | w. | Reclassification:
| | -- | -----------------

| | Certain
amounts from prior year have been reclassified to conform to the current years
presentation.
| | -----------------------------------------------------------------------------------------------------

F - 17

---

---



|CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES                 
|-----------------------------------------------------------
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|NOTE 2: |  | SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|------- | - | ---------------------------------------

| | x. | Impact
of recently issued Accounting Standards:
| | -- | -----------------------------------------------

| | In
June 2006, the FASB issued Interpretation 48, Accounting for Uncertainty in Income
Taxes (FIN 48), an interpretation of FASB Statement 109, Accounting
for Income Taxes. The Interpretation addresses the determination of whether tax
benefits claimed or expected to be claimed on a tax return should be recorded in the
financial statements. Under FIN 48, the Company may recognize the tax benefit from an
uncertain tax position only if it is more likely than not that the tax position will be
sustained on examination by the tax authorities, based on the technical merits of the
position. The tax benefits recognized in the financial statements from such a position
should be measured based on the largest benefit that has a greater than fifty percent
likelihood of being realized upon ultimate settlement.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | FIN
48 also provides guidance on de-recognition, classification, interest and penalties on
income taxes, accounting in interim periods and requires increased disclosures. FIN 48
applies to all tax positions related to income taxes subject to SFAS 109. This includes
tax positions considered to be routine as well as those with a high degree of
uncertainty. FIN 48 specifically prohibits the use of a valuation allowance as a
substitute for de-recognition of tax positions. The provisions of FIN 48 are effective
beginning January 1, 2007. The Company is currently assessing the impact that FIN 48 will
have on its consolidated financial statements.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
September 2006, the SEC issued Staff Accounting Bulletin No. 108, Financial
Statements  Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements (SAB 108). SAB 108
requires companies to quantify the impact of all correcting misstatements, including both
the carryover and reversing effects of prior year misstatements, on the current year
financial statements. SAB 108 is effective for fiscal years ending after November 15,
2006. The adoption of SAB 108 did not have any impact on the consolidated financial
statements.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
September 2006, the Financial Accounting Standards Board (FASB) issued SFAS
157, Fair Value Measurements (SFAS 157). This Standard defines
fair value, establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements. SFAS 157 is
effective for financial statements issued for fiscal years beginning after November 15,
2007 and interim periods within those fiscal years. The Company is currently assessing
the impact that SFAS 157 will have on its consolidated financial statements.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets
and Financial Liabilities (SFAS 159). SFAS 159 permits companies to
choose to measure certain financial instruments and certain other items at fair value.
The Standard requires that unrealized gains and losses on items for which the fair value
option has been elected be reported in earnings. SFAS 159 is effective for financial
statements issued for fiscal years beginning after November 15, 2007 and interim periods
within those fiscal years, although earlier adoption is permitted. The Company is
currently assessing the impact that SFAS 159 will have on its consolidated financial
statements.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 18

---

---



|CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES                 
|-----------------------------------------------------------
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|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, 2006.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Aggregate
maturities of held-to-maturity securities for years subsequent to December 31, 2006 are:
| | --------------------------------------------------------------------------------------------------

| |                                         | Amortized cost | Estimated fair
market value
| | --------------------------------------- | -------------- | ---------------------------
|
|
|
|
| | Held-to-maturity:                       |                |                            
| |                                         |                |                            
| | 2007 (short-term marketable securities) |                |                            
| | 2008                                    |                |                            
| | 2009                                    |                |                            
| |                                         |                |                            
| |                                         |                |                            
| |                                         |                |                            
| |                                         |                |                            

|NOTE 4: |  | OTHER
ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
|------- | - | ----------------------------------------------

| |                                                    | December 31,
| | -------------------------------------------------- | ------------
|
|
|
|
| | Government authorities                             |             
| | Prepaid expenses                                   |             
| | Receivables related to unrecognized sold inventory |             
| | Others                                             |             
| |                                                    |             
| |                                                    |             
| |                                                    |             
| |                                                    |             

F - 19

---

---



|CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES                 
|-----------------------------------------------------------
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|NOTE 5: |  | INVENTORIES
|------- | - | -----------

| |                   | December 31,
| | ----------------- | ------------
|
|
|
|
| | Raw materials     |             
| | Work in progress  |             
| | Finished products |             
| |                   |             
| |                   |             
| |                   |             
| |                   |             

| | Finished
goods include products shipped to customers for which revenues were not recognized during
the year (see also Note 2h) in the aggregate amount of $ 3,872 at December 31, 2005 and $
7,452 at December 31, 2006.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
2004, 2005 and 2006, the Company recorded inventory write-offs for excess inventory in a
total amount of $ 0, $ 7,082 and $ 716, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the fourth quarter of 2005, the Company terminated its legacy product line, closed its
in-house production facilities and transferred production activities to its contract
manufacturers. As a result of the Companys assessment of the expected sales from
such product line and the use of associated inventory the Company wrote off excess
inventory in a total amount of $ 7,082 in 2005.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company has been utilizing part of the products related to the components written-off in
2001 and 2005. During the years 2004 through 2006, inventory previously written-off was
used as components in products in the Companys ordinary course of production and was
sold as finished goods to customers. The sales of these related manufactured products were
reflected in the Companys revenues without additional cost to the cost of sales in
the period in which the inventory was utilized. The Company has been utilizing written-off
inventory of approximately $ 1,185, $ 954 and $ 426 in the years 2004, 2005 and 2006
respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 6: |  | PROPERTY
AND EQUIPMENT
|------- | - | ----------------------

| |                                                   | 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, 2004, 2005 and 2006 were $ 833, $ 972 and $
1,194, respectively.
| | -----------------------------------------------------------------------------------------------------------------------

F - 20

---

---



|CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES                 
|-----------------------------------------------------------
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|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 is obligated to repay the OCS approximately $ 11,887,
of which, $3,962 was recorded in short term liabilities and $ 7,925 in long-term
liabilities. The payment will be in six semiannual installments from 2007 through 2009.
The outstanding obligation is linked to the change in Israels Consumer Price Index
and bears interest.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, the Company is required to continue reporting to the OCS regarding its sales
each quarter until the obligation is fully paid. At each report, the Company is required
to calculate the amount which the Company would have been obligated to pay the OCS, had
the Company paid a royalty of 3.15% on all its sales for such quarter. If the resulting
amount is more than one-sixth of the $11,887, the Company will be required to pay the
difference in the same payment cycle. However, any such payments will be applied to the
last semiannual installments such that the total obligation will not be increased and the
period for paying the obligation may be shortened.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
total outstanding obligation as of December 31, 2006 in the amount of $11,887 was
expensed in 2006 as part of the cost of revenues.
| | ---------------------------------------------------------------------------------------------------------------------------------------

| | 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, 2006, are as follows:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 21

---

---



|CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES                 
|-----------------------------------------------------------
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|NOTE 8: |  | COMMITMENTS
AND CONTINGENT LIABILITIES (Cont.)
|------- | - | ----------------------------------------------

| | Year ended December 31, | Facilities | Motor vehicles | Total
| | ----------------------- | ---------- | -------------- | -----
|
|
|
|
| | 2007                    |            |                | $    
| | 2008                    |            |                |      
| | 2009                    |            |                |      
| | 2010                    |            |                |      
| | 2011 and thereafter     |            |                |      
| |                         |            |                |      
| |                         |            |               
| |                         |            |                | $    
| |                         |            |                |      

| | Expenses
for lease of facilities for the years ended December 31, 2004, 2005 and 2006 were
approximately $ 889, $ 997 and $ 1,115, respectively (see also Note 12).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Expenses
for the lease of motor vehicles for the years ended December 31, 2004, 2005 and 2006 were
approximately $ 629, $ 928 and $ 781, respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Charges
and guarantees:
| | -- | -----------------------

| | As
of December 31, 2006, the Company provided bank guarantees in an aggregate amount of $
2,183 with respect to tender offer guarantees and performance guarantees to its
customers.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | Potential
claim:
| | -- | ----------------

| | NEC
Corporation has asserted that the Company has been using its intellectual property in
certain of the Companys products. The Company is currently in discussions
concerning NECs allegation. The Company believes, based on its legal counselors
opinion, that Ceragon does not infringe any valid claim of the NEC patents at issue, and
if any of these patents were to be tried, a competent judge or jury would not find
Ceragon liable to NEC for patent infringement damages. However, the Company is not able
to estimate the outcome of such discussions. Accordingly, no provision was accrued in the
financial statements as of December 31, 2006.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|NOTE 9: |  | SHAREHOLDERS EQUITY
|------- | - | --------------------

| | The
Ordinary shares of the Company are traded on NASDAQ National 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. | 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 three to five years. The options           expire five or ten
years from the date of grant.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2002, the Company ceased granting options under the Plans in light of the
adoption of the 2003 Plan, although options granted under the Plans before December 31,
2002, are still valid, subject to the Plans.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 22

---

---



|CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES                 
|-----------------------------------------------------------
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|NOTE 9: |  | SHAREHOLDERS EQUITY
(Cont.)
|------- | - | ----------------------------

| | 2. | Pursuant
to its stock option plans, the Company reserved for issuance 12,973,188
          Ordinary shares. As of December 31, 2006, the Company still has 290,112
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.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following is a summary of the Companys stock options granted among the various
plans:
| | ------------------------------------------------------------------------------------------

| |                                        | Year ended December 31, 2006
| | -------------------------------------- | ----------------------------
|
|
|
|
| | 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            |                             
| |                                        |                             

| | All of the Companys options (except for the options noted below) were granted at
exercise prices which were 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 2004, 2005
and 2006 were $ 6.81, $ 5.58 and $ 6.08.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 2006 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, 2006. This amount is impact by the changes, in the fair
market value of the Companys shares. Total intrinsic value of options exercised
during the year ended December 31, 2006 was $ 3,905. As of December 31, 2006, there was $
1,670 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
September 2004, the Company granted 85,000 options at an exercise price below market
value at a fair value of $ 1.36.
| | ------------------------------------------------------------------------------------------------------------------------

| | During
the third quarter of 2005, the Company accelerated 104,791 options and recorded $ 115 as
of stock-based compensation accordingly.
| | ----------------------------------------------------------------------------------------------------------------------------------------

| | As
of the years ended December 31, 2004, 2005 and 2006, the Company recorded compensation
expenses of $ 374, $ 162 and $ 1,712, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------

F - 23

---

---



|CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES                 
|-----------------------------------------------------------
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|NOTE 9: |  | SHAREHOLDERS EQUITY
(Cont.)
|------- | - | ----------------------------

| | c. | 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, 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: 2006  31%, 2007  29%, 2008  27%, 2009 26%
and 2010 and thereafter  25%. Furthermore, as from 2010, upon reduction of the
corporate tax rate to 25%, real capital gains will be subject to tax of 25%.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Measurement
of taxable income:
| | -- | ------------------------------

| | Commencing
with the year 2003, 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). Such an elective obligates the Company for three years. Accordingly,
commencing the year 2003, results for tax purposes are measured in terms of earnings in
dollars.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | Tax
benefits under the Law for the Encouragement of Capital Investments, 1959
                    (theCapital Investment Law):
| | -- | --------------------------------------------------------------------------------------------------------------------------------

| | The
Companys production facilities have been granted 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% and 25% (depending on the percentage of
foreign ownership in each tax year).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 24

---

---



|CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES                 
|-----------------------------------------------------------
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|NOTE 10: |  | TAXES
ON INCOME (Cont.)
|-------- | - | -----------------------

| | For
the Companys three investment programs, the tax benefits are as follows: income
derived from investment programs is tax exempt for the first two years of the 10-year tax
benefit period, and is entitled to a reduced tax rate of 10%-25% during 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 canceled 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%-25% on the
amount of the dividend distributed. In addition, these dividends will be subject to a 15%
withholding tax in source.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys Board of Directors has determined that such tax-exempt income will not be
distributed as dividends. Accordingly, no deferred taxes will be required on tax exempt
income attributable to the Companys Approved Enterprise.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Capital Investments Law also grants entitlement to claim accelerated depreciation on
equipment used by the Approved Enterprise during the first five tax years
during which the equipment is used.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Income
from sources other than the Approved Enterprise during the benefit period
will be subject to the tax at the regular tax rate.
| | --------------------------------------------------------------------------------------------------------------------------------------

| | On
April 1, 2005, an amendment to the Capital Investments Law came into effect (the
Amendment) and has significantly changed the provisions of the Capital Investments
Law. The 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 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 25

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|CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES                 
|-----------------------------------------------------------
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|NOTE 10: |  | TAXES
ON INCOME (Cont.)
|-------- | - | -----------------------

| | As
a result of the 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. As of December 31, 2006, the Company did not generate income under the
provisions of the new law.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company has had no taxable income since inception.
| | ------------------------------------------------------

| | e. | 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 carryforward                          |             
| | Temporary differences relating to reserve and allowances |             
| |                                                          |             
| |                                                          |             
| | Total net deferred tax asset before valuation allowance  |             
| | Valuation allowance                                      |             
| |                                                          |             
| |                                                          |             
| | Net deferred tax asset                                   |             
| |                                                          |             

| | *) | Including
deferred taxes on losses for Israeli income tax purposes as of           December 31,
2005 and 2006, derived from the exercise of employee stock options           in the
amount of $ 4,049 and $ 4,573, respectively. The benefit derived from the
          exercise of employee stock options was not recorded through additional paid-in
          capital as required under APB 25 since a full 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.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2006, the Company has provided valuation allowances of $ 29,078 in
respect of deferred tax assets resulting from tax loss carryforward and other temporary
differences. The net change in the valuation allowance in the year 2006 amounted to $
4,099. Management currently believes that since the Company has a history of losses, it
is more likely than not that the deferred tax regarding the loss carryforward and other
temporary differences will not be realized in the foreseeable future.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | f. | Net
operating loss carryforward:
| | -- | --------------------------------

| | The
Company has accumulated losses for Israeli income tax purposes as of December 31, 2005
and 2006, in the amount of approximately $ 77,200 and $ 78,800, respectively. These
losses may be carried forward and offset against taxable income in the future for an
indefinite period.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 26

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---



|CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES                 
|-----------------------------------------------------------
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|NOTE 10: |  | TAXES
ON INCOME (Cont.)
|-------- | - | -----------------------

| | As
of December 31, 2006, the Companys U.S. subsidiary had a U.S. federal net operating
loss carryforward of approximately $ 10,274 that can be carried forward and offset
against taxable income and that expires during the years 2019 to 2025. 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | g. | Pre-tax
income (loss) is comprised as follows:
| | -- | ----------------------------------------------

| |          | Year ended December 31,
| | -------- | -----------------------
|
|
|
|
| | Domestic |                        
| | Foreign  |                        
| |          |                        
| |          |                        
| |          |                        
| |          |                        

| | h. | 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,
| | -------------------------------------------------------------------------------------------------------------------------- | -----------------------
|
|
|
|
| | Pre-tax income  (loss) 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                                                                                                    |                        
| | Deferred taxes on losses (utilization of losses) and temporary
   differences for which a valuation allowance was provided |                        
| | Tax adjustment due to Approved Enterprise's different tax rate                                                             |                        
| | Other                                                                                                                      |                        
| |                                                                                                                            |                        
| |                                                                                                                            |                        
| | Actual tax expense                                                                                                         |                        
| |                                                                                                                            |                        

F - 27

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|CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES                 
|-----------------------------------------------------------
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|NOTE 11: |  | GEOGRAPHIC
INFORMATION AND SELECTED STATEMENTS OF OPERATIONS DATA
|-------- | - | -----------------------------------------------------------------

| | a. | Segments,
customers and geographical information:
| | -- | -------------------------------------------------

| | 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following presents total revenues for the years ended December 31, 2004, 2005 and 2006
and long-lived assets as of December 31, 2004, 2005 and 2006:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                   | Year ended December 31,
| | ------------------------------------------------- | -----------------------
|
|
|
|
| | Revenues from sales to external customers:        |                        
| |                                                   |                        
| | North America                                     |                        
| | Europe, Middle East and Africa                    |                        
| | Asia-Pacific                                      |                        
| | Latin America                                     |                        
| |                                                   |                        
| |                                                   |                        
| |                                                   |                        
| |                                                   |                        
| | Property and equipment, net, by geographic areas: |                        
| |                                                   |                        
| | Israel                                            |                        
| |                                                   |                        
| | Others                                            |                        
| |                                                   |                        
| |                                                   |                        
| |                                                   |                        
| |                                                   |                        

| | Major
customer data as a percentage of total revenues:
| | ------------------------------------------------------

| |            | Year ended December 31,
| | ---------- | -----------------------
|
|
|
|
| | Customer A |                        
| | Customer B |                        
| | Customer C |                        

| | *) | Less
than 10% of total revenues.
| | -- | --------------------------------

F - 28

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|CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES                 
|-----------------------------------------------------------
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|NOTE 11: |  | GEOGRAPHIC
INFORMATION AND SELECTED STATEMENTS OF OPERATIONS DATA (Cont.)
|-------- | - | -------------------------------------------------------------------------

| | b. | Financial
income, net:
| | -- | ----------------------

| |                                                     | Year ended December 31,
| | --------------------------------------------------- | -----------------------
|
|
|
|
|
| | Financial income:                                   |                        
| | Interest on marketable securities and bank deposits |                        
| |                                                     |                        
| | Foreign currency translation differences            |                        
| |                                                     |                        
| |                                                     |                        
| |                                                     |                        
| |                                                     |                        
| | Financial expenses:                                 |                        
| | Bank commissions                                    |                        
| | Foreign currency translation differences            |                        
| |                                                     |                        
| |                                                     |                        
| |                                                     |                        
| |                                                     |                        
| |                                                     |                        
| |                                                     |                        
| |                                                     |                        

| | c. | 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 Ordinary shares                                                                     |                        
| |                                                                                                       |                        
| |                                                                                                       |                        
| | Effect of dilutive securities:                                                                        |                        
| | Employee stock options                                                                                |                        
| |                                                                                                       |                        
| |                                                                                                       |                        
| | Denominator for diluted net earnings (loss) per share - adjusted
   weighted average number of shares |                        
| |                                                                                                       |                        

| | *) | Antidilutive.
| | -- | -------------

F - 29

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|CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES                 
|-----------------------------------------------------------
|                                                           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                 
|                                                           
|U.S. dollars in thousands (except share and per share data)

|NOTE 12: |  | 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 and Zohar Zisapel is the Chairman of the Board of
Directors and a principal shareholder of the Company. They are brothers who, as of
December 31, 2005 and 2006, jointly own 22.5% and 21.6%, respectively of the
Companys Ordinary shares. 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 legal, management
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 $ 180, $ 335 and $ 246 in 2004, 2005 and 2006, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company leases its offices in Israel from real estate holding companies controlled by
Yehuda and Zohar Zisapel. During 2005, the Company extended its facility lease agreement
for an additional two years. Additionally, the Company leases the U.S. subsidiary office
space from a real estate holding company controlled by Yehuda and Zohar Zisapel. The lease
for this facility is valid until September 2008. The aggregate amount of rent and
maintenance expenses related to these properties was approximately $ 900 in 2004, $ 800 in
2005 and $ 400 in 2006.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company purchases certain inventory components from other members of the RAD-BYNET group,
which are integrated into its products. The aggregate purchase price of these components
was approximately $ 560, $ 1,660 and $ 3,009 for the years ended December 31, 2004, 2005
and 2006, 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 - 30

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