As filed with the Securities and Exchange Commission on May 27, 2003

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UNITED STATESSECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549

FORM 20-F

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2002
Commission File No. 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:

None

(Title of each Class)

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

Ordinary Shares, Par Value NIS .01

(Title of Class)

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:  As of December 31, 2002, Registrant had  22,578,346 Ordinary
Shares outstanding.

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:

|Yesx | Noo
|---- | ---

Indicate by check mark which financial
 statement item the registrant has elected to follow:

|Item 17o | Item 18x
|-------- | --------



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# TABLE OF CONTENTS

|         |                                                                              | Page
|-------- | ---------------------------------------------------------------------------- | ----
|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                                                   | 14  
|         |                                                                              |     
|ITEM 5.  | Operating and Financial Review and Prospects                                 | 27  
|         |                                                                              |     
|ITEM 6.  | Directors, Senior Management and Employees                                   | 36  
|         |                                                                              |     
|ITEM 7.  | Major Shareholders and Related Party Transactions                            | 48  
|         |                                                                              |     
|ITEM 8.  | Financial Information                                                        | 51  
|         |                                                                              |     
|ITEM 9.  | The Offer and Listing                                                        | 54  
|         |                                                                              |     
|ITEM 10. | Additional Information                                                       | 55  
|         |                                                                              |     
|ITEM 11. | Quantitative and Qualitative Disclosures About Market Risk                   | 61  
|         |                                                                              |     
|ITEM 12. | Description of Securities Other than Equity Securities                       | 61  
|         |                                                                              |     
|ITEM 13. | Defaults, Dividend Arrearages and Delinquencies                              | 62  
|         |                                                                              |     
|ITEM 14. | Material Modifications to the Rights of Security Holders and Use of Proceeds | 62  
|         |                                                                              |     
|ITEM 15. | Controls and Procedures                                                      | 62  
|         |                                                                              |     
|ITEM 16. | [RESERVED]                                                                   | 62  
|         |                                                                              |     
|ITEM 17. | Financial Statements                                                         | 63  
|         |                                                                              |     
|ITEM 18. | Financial Statements                                                         | 63  
|         |                                                                              |     
|ITEM 19. | Exhibits                                                                     | 63  

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# 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 of Ceragon Networks Ltd. and its consolidated subsidiaries
(together, Ceragon, we, or us) set forth below is
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, 2002.
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.

|                                       | 1998            | 1999           | 2000             | 2001             | 2002            
|-------------------------------------- | --------------- | -------------- | ---------------- | ---------------- | ----------------
|Consolidated Statement of              |                 |                |                  |                  |                 
|Operations Data:                      
|Revenues                               | $           426 | $        4,552 | $        29,197  | $        24,852  | $        18,394 
|Cost of revenues                       | 316             | 3,624          | 16,605           | 45,282           | 12,791          
|                                       |                 |                |                  |                  |                 
|                                       |                 |                |                  |                  |                 
|Gross profit (loss)                    | 110             | 928            | 12,592           | (20,430)         | 5,603           
|Operating expenses:                   
|                                       |                 |                |                  |                  |                 
|Research and development               | 3,330           | 5,000          | 9,904            | 12,967           | 9,143           
|                                       |                 |                |                  |                  |                 
|Less: grants and participations        | 1,176           | 1,621          | 2,211            | 2,660            | 1,870           
|                                       |                 |                |                  |                  |                 
|Research and development, net          | 2,154           | 3,379          | 7,693            | 10,307           | 7,273           
|                                       |                 |                |                  |                  |                 
|Selling and marketing, net             | 669             | 2,560          | 8,790            | 11,924           | 9,130           
|                                       |                 |                |                  |                  |                 
|General and administrative,            | 225             | 483            | 1,926            | 5,770            | 2,031           
|Amortization of deferred stock        
|compensation (a)                       | 304             | 1,758          | 9,529            | 6,431            | 2,974           
|Non-recurring expenses, net            | --              | --             | --               | 4,750            | 83              
|                                       |                 |                |                  |                  |                 
|Total operating expenses               | 3,306           | 8,107          | 27,938           | 39,182           | 21,491          
|                                       |                 |                |                  |                  |                 
|Operating loss                         | (3,242)         | (7,252)        | (15,346)         | (59,612)         | (15,888)        
|Financing income net                   | 90              | (89)           | 2,470            | 2,769            | 1,528           
|                                       |                 |                |                  |                  |                 
|                                       |                 |                |                  |                  |                 
|Net loss                               | (3,152)         | (7,341)        | (12,876)         | (56,843)         | (14,360)        
|Dividend related to convertible       
|preferred shares                       | --              | --             | (22,328)         | --               | --              
|                                       |                 |                |                  |                  |                 
|Net loss attributable to ordinary     
|shareholders                           | $     (3,152)   | $     (7,341)  | $     (35,204)   | $     (56,843)   | $     (14,360)  
|                                       |                 |                |                  |                  |                 
|                                       |                 |                |                  |                  |                 
|Basic and diluted net loss per share . | $       (0.62)  | $       (1.42) | $         (3.06) | $         (2.69) | $         (0.64)
|                                       |                 |                |                  |                  |                 
|                                       |                 |                |                  |                  |                 
|Weighted average number of shares     
|used in computing basic               
|and diluted net loss per share         | 5,089,000       | 5,161,000      | 11,501,722       | 21,099,336       | 22,375,939      
|                                       |                 |                |                  |                  |                 

1

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(a)    
          Amortization of deferred stock compensation relates to the following:

|                                     | 1998   | 1999     | 2000    | 2001    | 2002   
|------------------------------------ | ------ | -------- | ------- | ------- | -------
|Cost of revenues                     | $   46 | $     73 | $   603 | $   400 | $   214
|Research and development expenses    | 145    | 470      | 3,408   | 2,248   | 958    
|Selling and marketing expenses       | 113    | 664      | 3,085   | 1,984   | 1,072  
|General and administrative expenses  | 0      | 551      | 2,433   | 1,799   | 730    
|                                     |        |          |         |         |        
|Total amortization of deferred stock
|compensation                         | $(304) | $1,758   | $9,529  | $6,431  | $2,974 
|                                     |        |          |         |         |        

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.

|                                          | 1998     | 1999   | 2000      | 2001    | 2002   
|----------------------------------------- | -------- | ------ | --------- | ------- | -------
|Consolidated Balance Sheet Data:          |          |        |           |         |        
|Cash and cash equivalents, short and long
|term bank deposits, short and long term  
|marketable securities,                    | $    104 | $1,149 | $  80,320 | $53,721 | $43,173
|Working capital                           | (357)    | 3,365  | 104,558   | 55,361  | 30,386 
|Total assets                              | 2,082    | 7,938  | 128,050   | 72,086  | 61,640 
|Total long term debt                      | 4,718    | 1,173  | --        | --      | --     
|Shareholders' equity (deficit)            | (3,688)  | 3,330  | 111,068   | 60,619  | 49,266 

# Risk Factors

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. These forward-looking statements are subject to risks, uncertainties, and
assumptions about our company, including, among other things:

| |  | our
strategy
| | - | ------------

| |  | market
demand and acceptance of our products and technology
| | - | -----------------------------------------------------------

| |  | projected
capital expenditures and liquidity
| | - | --------------------------------------------

| |  | development
of new products
| | - | ---------------------------

| |  | the
possibility of the market in which we compete being impacted by changes in political,
economic or other factors, such as monetary policy, legal and regulatory changes or other
external factors over which we have no control
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | our
suppliers
| | - | -------------

2

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Forward-looking
statements can be identified by the use of forward-looking terminology such as
may, will, expect, anticipate,
estimate, continue 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.

Risks Relating to Our
Business

Due to our limited operating
history, it is difficult to evaluate our business or predict our future operating results.

We
are an early stage company in the rapidly evolving market for broadband wireless
equipment. We began operations in July 1996 and did not record our first revenues until
the second half of 1998. This limited operating history makes it difficult to evaluate our
business and to assess our future. Our limited operating history may impede our insight
into emerging market trends and affect our business. If we do not properly respond to
these trends, our operating results may be negatively affected.

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

We
incurred significant operating and net losses in every fiscal year since our inception and
we may continue to incur losses in the future. We reported net losses of $3.2 million for
1998, $7.3 million for 1999, $12.9 million for 2000, $56.8 million for 2001 and $14.4
million for 2002. As of December 31, 2002, our accumulated deficit was $ 118.3 million.
Despite continuing expense reduction measures, our operating expenses may not decrease as
rapidly as anticipated. As a result, net cash outflows and operating net losses may
continue for the near term. If our sales do not increase or if our expenses increase at a
greater pace than our revenues, we will not be profitable. Even if we achieve
profitability, we may not be able to sustain or increase profitability on a quarterly or
annual basis.

Our quarterly financial
performance is likely to vary significantly in the future. Our revenues and operating
results in any quarter may not be indicative of our future performance. It may therefore
be difficult for investors to evaluate our prospects.

Our
quarterly revenues and operating results have varied significantly in the past and are
likely to continue to vary significantly in the future. Fluctuations in our quarterly
financial performance may result from the fact that we may receive a small number of
relatively large orders in any quarter. The deferral or loss of one or more significant
sales could materially affect our operating results in any fiscal quarter, especially if
there are significant sales and marketing expenses associated with the deferred or lost
sales. Because large orders generate disproportionately large revenues, our revenues and
the rate of growth of our revenues for a particular quarter may reach levels that may not
be sustained in subsequent quarters. Thus, our revenues and operating results in any
quarter may not be indicative of future performance and it may be difficult for investors
to evaluate our prospects.

3

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Because of the economic downturn
in the global economy and tightening of global capital markets for telecommunications
projects, the demand for our products and services may decrease.

Due
to the global economic downturn, and the continued tightening of the capital markets for
telecommunications and mobile cellular projects during calendar 2002, our business
opportunities in the United States, Europe, Asia and other countries and geographic
regions where we conduct business may increase at a slower than anticipated rate. To the
extent that the economic downturn and the global tightening of the capital markets
continue, the demand for our products and services may increase at a slower than
anticipated rate in these countries and geographical regions. This could result in our
customers delaying or canceling the purchase of our products, which could have a negative
impact on our revenues.

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. We believe that the length of the sales cycles will continue to increase in
light of the more conservative spending by many customers and potential customers due to
current market conditions.

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. 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 these revenue declines
occur, our business, financial condition, and results of operations could be harmed.

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
independent manufacturers to manufacture circuit boards and other components for our
products. This could result in a disruption in supply of these components.

We
currently rely on independent manufacturers to produce circuit boards and other components
used in our products. We do not have long-term contracts with most of these independent
manufacturers. We have experienced and may in the future experience delays in shipments
from these manufacturers. This could delay product shipments to our customers. We may 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. In addition, due to continuing economic
uncertainty, our suppliers have experienced and are continuing to experience various
financial difficulties which may impact their ability to supply the materials, components
and subsystems that we require.   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.

4

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We obtain some of the components
included in our products from a single source or a limited group of suppliers. If we lose
any of these suppliers, we may experience production delays and a substantial loss of
revenue.

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

| |  | Our
suppliers could increase component prices significantly at any time and with immediate
effect. This would increase our component procurement costs and could result in reduced
gross margins.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Our
suppliers may experience shortages in components and interrupt or delay their shipments
to us. This may delay our product shipments to our customers and result in penalties
and/or cancellation of orders for our products.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Our
suppliers could discontinue the manufacture or supply of components used in our systems.
If this occurs and we are unable to develop alternative sources for components, we might
need to modify our products. This would likely interrupt our 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.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

As a result of materials order
cancellations and delivery postponements to our vendors, we may be subject to legal action
by such vendors which, if successful, could result in damages against us.

In
connection with our efforts to tailor our manufacturing rate to current demand in light of
the current economic downtown, as well as the general slowdown in the telecommunications
market, we have cancelled certain orders for components, or postponed delivery dates for
certain components. One or more of our suppliers may seek to initiate legal actions
against us as a result of these actions. While we do not anticipate that any such
potential action would materially affect our business, such action would likely have an
adverse impact on our relationship with any such suppliers, and may adversely impact our
relationship with affiliated suppliers. If such potential claims are filed, and are
successful against us, we may be required to pay damages to the successful claimants.

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

The
acceptance of the broadband 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.
| | - | ----------------------------------------------

5

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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.

If we do not succeed in developing
and marketing new and enhanced broadband 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 to
support additional frequency bands and higher transmission speeds subject to current
budgeting constraints. 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.

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

The
market for broadband 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 large communications equipment
suppliers, including Alcatel, Stratex Networks, Nera Telecommunications, L.M. Ericsson,
Microwave Communications Division of Harris Corporation, NEC, Marconi, SIAE, Siemens AG,
as well as several private companies currently in the startup stage, and a number of other
companies have developed 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. 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
original equipment manufacturers (OEMs) through which we market and sell our products. 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.

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, 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.

6

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Competition and current market
conditions have resulted in increased 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. Furthermore, our customers and
potential customers are increasingly concentrating on limitations and reductions on their
capital expenditures as well as return on investment (ROI) in connection with their
purchasing decisions. 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. Any inability by us to
effectively respond to such situation 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 free space optics, low to medium capacity point-to-point radios, fiber optic
lines, and other wireless technologies. Some of these technologies utilize existing
installed infrastructure and have achieved significantly greater market acceptance and
penetration than high-capacity broadband wireless technologies. 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. Some operators in this industry have
experienced financial difficulty and have filed, or may file, for bankruptcy protection or
have been or may be acquired by other operators. 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.

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.

7

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

Broadband
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 broadband 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 broadband wireless equipment.

The global economic slowdown has
particularly affected telecommunications equipment manufacturers and service providers,
and the demand for telecommunications equipment, such as ours, has diminished.

The
global economic slowdown has resulted in reduced demand for advanced telecommunications
equipment due to cost cutting and general spending limits imposed by telecommunications
service providers. This has had a significant impact on products like ours.

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

We
have significantly increased sales to customers in the cellular market, to support
wireless requirements for second and third generation cellular networks. For sales in the
cellular market, any delays by cellular providers in their second and 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 our significant volume of
international sales and our rapid expansion into new 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 net product sales for
the foreseeable future. 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. Some of the risks and challenges of doing business
internationally include:

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

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

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

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

| |  | burden
of complying with a variety of foreign laws; and
| | - | -------------------------------------------------------

| |  | general
economic and geopolitical conditions, including inflation and trade relationships.
| | - | ------------------------------------------------------------------------------------------

8

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The unpredictability of our
quarter-to-quarter results may harm the trading price of our common stock.

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 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 common stock 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 common
stock.

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 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.

9

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Our products operate on government
licensed radiospectrum 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 on government licensed radiospectrum 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 radiospectrum 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 broadband 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.

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, patents 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.

10

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

Our
non-competition agreements with permanent employees in Israel prohibit these employees
from directly competing with us or working for our competitors. However, under current
law, we may not be able to enforce these agreements. 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. We do not have non-competition
agreements with our employees outside of Israel, although we do have non-disclosure
agreements with all employees and consultants worldwide.

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 a change of control.

As of December 31, 2002, Yehuda and
Zohar Zisapel, who are brothers that do not vote as a group and who do not have a voting
agreement, beneficially own, directly or through entities they control, 25.3% of the
outstanding ordinary shares. As a result, these shareholders may control the outcome of
various actions that require shareholder approval. For example, they may be able to elect
our directors, 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 2002 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.

11

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Risks Relating to Our
Location in Israel

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

Our
principal offices, manufacturing facilities and research and development facilities are
located in Israel. Political, economic and military conditions in Israel could directly
affect our operations. We could be adversely affected by any major hostilities involving
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 adversely affected the peace
process and has negatively influenced our relationship with several Arab countries. Such
ongoing hostilities may hinder Israels international trade relations and may limit
the geographic markets where we can sell our products. Such events could have a material
adverse effect on our operations and business.

Some
neighboring 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. We are also precluded from marketing our products to certain of these
countries due to U.S. and Israeli regulatory restrictions. Because none of our revenue is
currently derived from sales to these countries, 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.

Generally,
male adult citizens and permanent residents of Israel under the age of 51 are obligated to
perform up to approximately 31 days of military reserve duty annually, depending on their
age and prior position in the army. Additionally, these residents may be called to active
duty at any time under emergency circumstances. Many of our officers and employees are
currently obligated to perform annual reserve duty. We believe that we have operated
effectively given these requirements since we began operations, including during recent
events in Iraq. Nevertheless, we cannot assess the full impact of these requirements on
our workforce or business if conditions should change, and we cannot predict the effect on
our business operations of any expansion or reduction of these obligations.

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

Because a majority of our revenues
are generated in U.S. dollars and Euro 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.

A
majority of our revenues are in dollars and Euro, while a portion of our expenses,
principally salaries and the related personnel expenses for Israeli employees and
consultants, local vendors and subcontractors are in new Israeli shekels, or 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 and/or Euro or that the timing of
this devaluation lags behind inflation in Israel. This 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.

The government grants we have
received for research and development expenditures limit our ability to manufacture
products and transfer technologies outside of Israel and require us to satisfy specified
conditions. If we fail to satisfy these conditions, we may be required to refund grants
previously received.

We
currently receive grants from the Government of Israel through the Office of the Chief
Scientist of the Ministry of Industry and Trade, or Chief Scientist, for the financing of
a significant portion of our research and development expenditures in Israel. In 2000,
2001 and 2002 we received or accrued Chief Scientist grants totaling approximately $2.2
million, $2.7 million, and $1.9 million representing approximately 22%, 21%, and 21%
respectively, of our total research and development expenditures in these periods. The
terms of the Chief Scientist grants limit our ability to manufacture products or transfer
technologies, outside of Israel, if such products or technologies were developed using
Chief Scientist grants. In addition, if we fail to comply with any of the conditions
imposed by the Chief Scientist, we may be required to refund any payments previously
received, together with interest and penalties.

12

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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 and Trade has granted approved enterprise
status to an investment program at our manufacturing facility in Tel Aviv. When we begin
to generate net income from this approved enterprise program, the portion of our income
derived from this program 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.

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 in Israel. Substantially all of our executive officers and directors
named in this annual report are nonresidents of the United States, and a substantial
portion of the assets of these persons are located outside the United States, although a
significant portion of our assets are located in the U.S. It may be difficult for an
investor, or any other person or entity, to enforce a U.S. court judgment based upon the
civil liability provisions of U.S. federal securities laws in an Israeli court or to
effect service of process upon these persons. Additionally, it may be difficult for an
investor, or any other person or entity, to enforce civil liabilities under U.S. federal
securities laws in original actions instituted in Israel.

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

The
Israeli Companies Law generally requires that a merger be approved by the board of
directors and a majority of the shares voting on the proposed merger. Unless a court rules
otherwise, the merger will not be deemed approved if a majority of the shares held by
parties other than the other party to the merger (or by any person who holds 25% or more
of the shares or the right to appoint 25% or more of the directors of the other party)
vote against the merger. 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. Finally, a merger may not be completed unless at least 70 days have
passed since the filing of the merger proposal with the Israeli Registrar of Companies.

13

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In
certain circumstances 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
45% shareholder of the company (unless there is already a 25% or a majority shareholder of
the company, respectively). If, as a result of an acquisition, the acquirer would hold
more than 90% of a companys shares, the acquisition must be made by means of a
tender offer for all of the shares. The described restrictions could prevent or make more
difficult an acquisition of Ceragon which could depress our share price.

Also,
Israel tax law treats some acquisitions, such as stock-for-stock exchanges between an
Israeli company and a foreign company, less favorable than U.S. tax laws. For example,
Israeli tax law may, under certain circumstances, subject a shareholder who exchanges his
ordinary shares for shares in another corporation, to taxation prior to the sale of the
shares received in such stock-for-stock swap.

# ITEM 4. INFORMATION ON
THE COMPANY

# 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, as part of the
resolution of a dispute concerning the use of the word Giganet. We operate
under the Israeli Companies Law, 1999. 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. 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 777 Corporate Drive, Mahwah, New Jersey 07430.

In
the years ending December 31, 2002 and December 31, 2001, our capital expenditures, net of
investment grants from the Government of Israel, were $0.4 million and $2.3 million,
respectively, and were spent primarily on production equipment and leasehold improvements.
These capital expenditures were financed by the proceeds from our initial public offering
and our financings. In the year ending December 31, 2000, our capital expenditures, net of
investment grants from the Government of Israel, were $6.5 million and were spent
primarily on production equipment. These capital expenditures were financed primarily by
the proceeds from our initial public offering. We have satisfied all bank loans. We have
no current commitments for capital expenditures.

# Business Overview

We
design, develop, manufacture and sell high-capacity wireless network equipment for
cellular operators, fixed operators (also known as incumbent operators) and private
networks (formerly referred to as enterprises). Our products provide high-speed,
fiber-like transmission quality and can be deployed more rapidly and cost effectively than
fiber optic lines. Our products operate over most of the 6-38 GHz high-frequency bands,
which are licensed by various countries in North America, Europe, Middle East, Africa,
Latin America, and the Asia-Pacific region for use by the end customer.

We
primarily target fixed and mobile communications service providers and private networks
that require high capacity connectivity. To date, our products have been commercially
deployed in more than 40 countries by communications service providers, including local
telephone companies and cellular telephone service operators, and large corporate
organizations. Cellular operators use our products to connect their cell sites or switch
locations to provide what is referred to as backhaul. Fixed operators use our
products as an integral part of their high-capacity metropolitan ring and access networks.
The private networks, which include universities, financial institutions, corporate
campuses, and hospitals, use our equipment for their internal data and telecommunications
needs. We sell our products through a direct sales force, systems integrators,
distributors, resellers and original equipment manufacturers.

In
general, the telecommunications equipment business is seasonal to the extent that sales in
the first quarter of each calendar year are typically less than in other quarters.
Nevertheless, our historical results do not reflect such seasonality.

14

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Products

Our
products consist of a compact high-performance antenna, an outdoor unit, an indoor unit
and our SNMP-based proprietary network management software. The antenna transmits and
receives microwave radio signals. The outdoor unit controls the power transmission and
provides an interface between the antenna and the indoor unit. The outdoor unit is
enclosed in a compact weather-proof enclosure. It is fastened to the antenna with four
latches and, therefore, is easily detachable from the antenna. The antenna is mounted on a
pole which is typically mounted on a rooftop or the side of a building. The indoor unit is
connected to the outdoor unit by a standard coaxial cable. The indoor unit:

| |  | converts
the transmission signals from digital to radio and vice versa;
| | - | -----------------------------------------------------------------------

| |  | processes
and manages information transmitted to and from the outdoor unit;
| | - | ---------------------------------------------------------------------------

| |  | aggregates
multiple transmission signals; and
| | - | ---------------------------------------------

| |  | provides
the physical interfaces to the wireline network.
| | - | ---------------------------------------------------------

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 up to 30 miles. 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 communications service provider. We
market our products under the name FibeAir. The FibeAir products utilize multiple
modulation schemes, which increase the flexibility of our products by giving service
providers the ability to choose between increased range or increased spectral efficiency.
The FibeAir family includes the following products.

FibeAir
1500. The FibeAir 1500 system provides 155 Mbps of transmission capacity for various
communications protocols using 16 QAM modulation method.

FibeAir
1528. The FibeAir 1528 system provides 155 Mbps of transmission capacity in a more
spectrally efficient manner for various communication protocols using 128 QAM modulation
method.

FibeAir
3100.The FibeAir 3100 system provides up to 311 Mbps of transmission capacity for
various communication protocols. This is a high-frequency system with capacity that can be
expanded from 155 to 311 Mbps.

FibeAir
3128. The FibeAir 3128 is an advanced ultra-high capacity, IU high, network
connectivity solution. It delivers 311 Mbps or 2 x STM-1/OC-3 over a single 28 MHz channel
using dual carriers with a cross-polar interference canceller (XPIC) mechanism. This
advanced mechanism, which supports co-channel dual polarization (CCDP) operation, enables
enhanced spectrum utilization.

Network
Management Protocol Software. We support our products with a full suite of network
management tools designed to be easily integrated with communications networks of service
providers which are branded as CeraView and PolyView.

CeraView.
          CeraView is an advanced SNMP-based management application which is used for
          complete configuring and monitoring operations of FibeAir systems. CeraView runs
          over Windows 95/98/2000/NT and UNIX Platforms, and offers a user-friendly
          graphical user interface. For large networks, CeraView is also designed to run
          over HP OpenView and SNMPc.

PolyView.PolyView is Ceragons family of network management applications that
          can be used to monitor network element status, provide statistical and inventory
          reports, download software and configuration to elements in the network, and
          other network-level operations. PolyView integrates with other NMS platforms,
          such as HP OpenView, to provide more comprehensive network management.

15

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Our
products can be managed locally by our management software or interfaced to the management
network system of the communications service provider. Our network management software
allows communications service providers to monitor performance and troubleshoot
difficulties remotely from multiple locations.

| | Our
Solution
| | ------------

| | Our
wireless solutions possess the following capabilities:
| | ----------------------------------------------------------

| |  | High-Speed
Communications. Our products enable the delivery of full-duplex, high-speed Internet
access and integrated data, video and voice communications at transmission speeds of 45,
100, 155, 311 and 622 Mbps, as compared to less than 10 Mbps attainable via commercially
available DSL or cable or up to 16 Mbps attainable under commercially available
point-to-multipoint systems. Our products deliver fiber-like transmission quality with
error rates of less than one error per ten trillion bits transmitted.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Cost
Effectiveness. Our products avoid the high costs associated with the deployment of
fiber optic networks, including the cost of digging up streets, and obtaining municipal
permits and rights of way to lay fiber optic lines. It is commonly estimated that digging
costs for laying fiber optic lines in metropolitan areas are approximately $150 thousand
per mile. Our wireless products further reduce costs because, unlike fiber optic lines,
our products can be redeployed and reused at a negligible cost as customer needs change.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Rapid
Deployment and Time to Market. Communications service providers can deploy our
products and provide their business subscribers with broadband access within a matter of
hours. Our products are light-weight, compact and easy to install and maintain. Our
product set-up and configuration, including operating frequency channel, is determined by
our proprietary management software. This feature simplifies the installation process and
reduces installation time. Our products can be installed on rooftops or on the sides of
buildings in a matter of hours, as compared to competing wireless products which may
require days or weeks to deploy or fiber optic networks which may require months or years
to deploy. Rapid deployment enables service providers to roll out service to subscribers
and generate revenues quickly.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Multi-Protocol
Options. Our products work with the most common transmission standards used in
communications networks around the world.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------

| |  | 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 high frequency bands in each region. The high-frequency bands are
allocated by government licensing authorities for high-capacity transmissions in the
metropolitan area. Our products operate in the 6, 7, 8, 13, 15, 18, 23, 26, 28, 29, 31
and 38 GHz high-frequency bands, the principal licensed high-frequency bands currently
available for commercial use throughout the world.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Meet
Multiple Regulatory Standards. We design our products to meet North American and
European standards. The European standards have been developed by the European
Telecommunications Standards Institute, commonly referred to as ETSI, and have been
adopted in most countries excluding those in North America. With some minor modular
modifications, any of our products originally assembled to comply with North American
standards may be easily adapted by communications service providers for compliance with
European standards and vice versa. The international compatibility of our products makes
them attractive to global communications service providers and equipment vendors that
deploy communications networks in North American and international markets. Global
communications service providers and equipment vendors that invest significant time and
effort in studying, testing and approving our products prior to their deployment in
communications networks in North American or international markets may deploy our
products on a more expedited basis in communications networks in the other markets as
well.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

16

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| |  | Modular
Architecture. Our products contain plug-in units that can easily be replaced or
exchanged in the field. Our modular product design enables us to standardize our
manufacturing process cost efficiently and concurrently manufacture each product to
satisfy the individual requirements of each service provider on an expedited basis. It
also enables service providers to easily adapt our products for use in different network
environments. For example, modularity enables service providers to easily change our
products to support different communications protocols by simply replacing the relevant
modular components.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 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 communications service providers to
deploy them incrementally as demand for their services increases. This allows the
communication service providers to match capital outlays with subscriber growth. Our
customers can establish a wireless broadband network with a relatively low initial
investment, in comparison to 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.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | High
Reliability and Availability. We design our products to match the reliability
standard required by service providers, including 99.999% availability. This means that
our products maintain connectivity 99.999% of the time, corresponding to approximately
five minutes of down time per year, even under adverse weather conditions. 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 announced the first high-capacity wireless system to offer a
built-in-DES-based encryption solution. Our user-friendly EncryptAir solution has
been validated by the National Institute of Standards and Technology (NIST).
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Multiple
Modulation Schemes. The FibeAir product family utilizes multiple modulation schemes,
including 16 QAM and 128 QAM, enabling broadband wireless service providers to choose
either the 16 QAM modem for increased range, or the new 128 QAM modem for increased
spectral efficiency.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Add
 Drop Multiplexer (ADM).In 2002, we introduced the industrys first fixed
wireless SONET/SDH system with a built-in add-drop-multiplexer. The integrated FibeAir
solution relieves network operators of the need to install a stand alone ADM at each
backbone connection.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

17

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These
benefits may be offset by the following disadvantages and limitations of our wireless
solutions relative to the solutions offered by our competitors. 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. Because our products require a direct line-of-sight between antennas,
service providers often install our products on rooftops of buildings and on other tall
structures. As a result, service providers must generally secure roof 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 either 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.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Network
Applications

Our
FibeAir products are deployed in various network applications, based on the network
architecture and communications transmission requirements of our customers. These networks
include:

IP/Fast
Ethernet Gigabit Ethernet Networks. Internet protocol, or IP, is the transmission
standard of the Internet and private data networks. Fast Ethernet is the physical 100 Mbps
interface most commonly used for high-speed IP connections. Our products deliver full 100
Mbps throughput for fast Ethernet. Our products also deliver two fast Ethernet channels
over a single 155 Mbps system. 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. This feature substantially reduces
the service providers costs by eliminating the need to purchase external equipment
or double the links. Our products also deliver Gigabit Ethernet for ultra-high capacity IP
connections in metropolitan rings, high speed access connections, and private networks.

ATM
Networks. Asynchronous transfer mode, or ATM, is a high-capacity communications
protocol. An ATM network is a packet network that supports real-time voice and video
content, as well as data. ATM networks transmit all traffic in small constantly-sized
packets or cells. The constant cell size enables voice and video content to be processed
and transmitted effectively.

SONET/SDH
Networks. Synchronous optical network, or SONET, and its European counterpart,
synchronous digital hierarchy, or SDH, are the basic network communications protocols, or
standards, that exist today for intercity and international connectivity. These standards
are generally utilized in a fiber optic network organized in a ring formation. The ring
formation uses at least two transmission paths, or links, to each point so that traffic is
rerouted in the other direction if a link in the ring formation fails.

IP/Fast
Ethernet Over SONET/SDH Networks. Our products directly deliver IP packets over
SONET/SDH protocols. This unique feature enables our customers to connect our products to
the SONET/SDH backbone, and deliver the IP transmission over the entire SONET/SDH network
infrastructure. This feature substantially reduces the service providers costs by
eliminating the need to purchase an expensive router to convert the Ethernet traffic into
SONET/SDH frames.

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, third party integrators and others to coordinate network
design, ensure successful installation and provide continuous customer support. 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.

18

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Customers
and Markets

We
began selling our products commercially during the second half of 1998. Our products are
currently used by more than 100 customers in over 40 countries.

We
generally have written purchase agreements with our major customers. These contracts
typically do not contain minimum purchase commitments.

Our
principal end-user customers are cellular operators, fixed operators (also referred to as
incumbent operators), and private networks (formerly referred to as enterprise customers),
such as financial institutions, hospitals, universities, and corporate campuses. We
currently focus on the markets in Europe, Middle East, Africa, Asia-Pacific, Latin America
and North America. We target three principal applications for our products:

| |  | providing
cellular operators with high capacity connectivity to support increases in subscribers,
call sites, and data-rich applications for their cell sites and switching locations;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | providing
connectivity among points in a ring, access formation, and ADSL backhaul; and
| | - | ---------------------------------------------------------------------------------------

| |  | providing
connectivity within campuses of corporations or other organizations for their internal
              networks.
| | - | ------------------------------------------------------------------------------------------------------------------------

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

|                       | % of Revenues for year ended
December 31,
|---------------------- | -----------------------------------------
|
|                       |                                          
|North America          | 54.53%                                   
|EMEA*                  | 38.77%                                   
|Asia-Pacific and Latin
|America                | 6.70%                                    

* Europe, Middle
East, and Africa

Distribution Channels

In
2002, we sold our products through distributors, resellers, third party integrators and
original equipment manufacturers.

| | Direct
Sales
| | ------------

We
currently utilize a direct sales force to serve customers in North America, Europe, Middle
East, Africa, Asia-Pacific, Latin America and the rest of the world. Our direct sales
force targets cellular and fixed operators, distributors and resellers. Our direct sales
force also helps us build long-term relationships with actual and potential purchasers and
end-users, whether they are direct customers or end-users.

| | Marketing
Efforts
| | -----------------

The
principal goal of our marketing program is to educate existing and potential customers
about the capabilities and benefits of our products. 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.

19

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Manufacturing
and Assembly

Our
manufacturing operations consist of materials planning and procurement, assembly of
outdoor units, final product assurance testing, quality control and packaging and
shipping. We conduct the majority of these operations at our facility in Tel Aviv. We have
a flexible assembly process that is designed to reduce our assembly cycle time and reduce
our need to maintain a large inventory of finished goods. We extensively test our
products, both during and after the assembly process, using internally developed product
assurance testing procedures. The components for our products come primarily from the
United States, Europe and Asia. We currently do not have any difficulties with the supply
of components, and except with respect to the explanations in Risk Factors, we
do not anticipate any difficulties in the near future.

In
addition to our own manufacturing operations, we contract with third parties 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. Each of these third parties is
owned and operated independently of us and does not exclusively provide services to
Ceragon. In 2001, we entered into an agreement with a manufacturer to assemble and test
our indoor units for an initial two year term. At the end of the initial two year term,
this contract automatically renews every twelve months, unless terminated by either party
six months prior to the end of any such term. This agreement has not been terminated and
has been automatically renewed in accordance with the terms thereof. We have also entered
into two agreements with different third parties for the manufacture and testing of our
outdoor units. See ITEM 5. Operating and Financial Review and Prospects.

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.

Competition

The market for broadband
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 U.S. and international 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, Stratex
Networks, Nera Telecommunications, L.M. Ericsson, Microwave Communications Division of
Harris Corporation, NEC, Marconi, SIAE, Siemens AG, as well as several private companies
currently in the startup stage, and a number of other companies have developed or are
developing products that compete with ours. We believe we compete principally on the basis
of:

| |  | product
performance, design, features and inter-operability;
| | - | ------------------------------------------------------------

| |  | product
quality and reliability;
| | - | --------------------------------

| |  | price;
| | - | ------

| |  | ability
to deliver products on a timely basis; and
| | - | --------------------------------------------------

| |  | technical
support and customer service.
| | - | ---------------------------------------

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.

20

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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 Ceragon Networks and our logo in the United States, Israel,
and the European Union, and for Ceragon Networks in Canada. We have registered trademarks
for our design mark for FibeAir in the United States, Israel and the European Union. We
also have registered trademarks for CeraView in the United States, Israel and the European
Union.

In
2001, we filed a provisional patent application in the United States. We have decided not
to pursue the patent set forth in such application. We have not been issued any patents.

Conditions
in Israel

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

| | 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 monetary policy contributed to relative price and exchange rate
stability in recent years, despite fluctuating rates of economic growth and an
increasingly high rate of unemployment. We cannot assure you that the Israeli government
will be successful in its attempts to keep prices and exchange rates stable. Price and
exchange rate instability may have a material adverse effect on us.

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

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

21

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Israel
and the European Union concluded a free trade agreement in July 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. On January 1, 1993, an agreement between Israel and the
European Free Trade Association, known as the EFTA, established a free-trade zone between
Israel and EFTA nations. In November 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 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.

| | Tax
Reform
| | ----------

On
January 1, 2003, the Law for Amendment of the Income Tax Ordinance (Amendment No. 132),
5762-2002, known as the Tax Reform, came into effect.

The
Tax Reform, aimed at broadening the categories of taxable income and reducing the tax
rates imposed on employment income, introduced the following, among other things:

| |  | Reduction
of the tax rate levied on capital gains (other than gains deriving from the sale of
listed securities) derived after January 1, 2003, to a general rate of 25% for both
individuals and corporations;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Imposition
of Israeli tax on all income of Israeli residents, individuals and corporations,
regardless of the territorial source of income, including income derived from passive
sources such as interest, dividends and royalties;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Introduction
of controlled foreign corporation (CFC) rules into the Israeli tax structure;
| | - | ------------------------------------------------------------------------------------------

| |  | Imposition
of capital gains tax on capital gains realized by individuals as of January 1, 2003, from
the sale of shares of publicly traded Israeli companies (such gain was previously exempt
from capital gains tax in Israel in certain circumstances). For information with respect
to the applicability of Israeli capital gains taxes on the sale of our ordinary shares,
see IsraeliCapital Gains Tax on Sales of Shares below;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Introduction
of a new regime for the taxation of shares and options issued to employees and officers
(including directors); and
| | - | -------------------------------------------------------------------------------------------------------------------------------

| |  | Introduction
of tax at a rate of 25% on dividends paid by one Israeli company to another (which are
generally not subject to tax), if the source of such dividend is income that was derived
outside of Israel.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Tax
Benefits under the Law for the Encouragement of Capital Investments, 1959

The
Law for the Encouragement of Capital Investments, 1959, commonly referred to as the
Investment Law, provides that a proposed capital investment in eligible facilities may,
upon application to the Investment Center of the Ministry of Industry and Trade of the
State of Israel, be designated as an approved enterprise. Each certificate of approval for
an approved enterprise 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 company tax at the
maximum rate of 25%, rather than 36%, 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. However, this period is limited to twelve years from commencement of
production or fourteen years from the date of approval, whichever is earlier.

A
company owning an approved enterprise may elect to receive 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, 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.

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. 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 two years and will be subject to a reduced tax rate
for an additional eight years. The tax rate for the additional eight years 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 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 taxed at the reduced rate applicable to dividends from approved enterprises,
which is 15% if the dividend is distributed during the tax exemption period or within 12
years after the period. The company must withhold this tax at the source, regardless of
whether the dividend is converted into foreign currency.

Subject
to applicable provisions concerning income under the alternative package of benefits, all
dividends paid by a company are considered to be attributable to the entire enterprise and
their effective tax rate is the result of a weighted average of the various applicable tax
rates. Under the Investment Law, a company that has elected the alternative package of
benefits is not obliged to distribute exempt retained profits, and may generally decide
from which years profits to declare dividends. We currently intend to reinvest any
income derived from our approved enterprise programs and not to distribute the income as a
dividend.

The
Investment Center bases its decision whether or not to approve an application on the
criteria in the Investment Law and regulations, the then prevailing policy of the
Investment Center and the specific objectives and financial criteria of the applicant.
Therefore, we cannot assure you that any of our applications will be approved. In
addition, the benefits available to an approved enterprise are conditional upon the
fulfillment of conditions stipulated in the Investment Law and its regulations and the
criteria in the specific certificate of approval, as described above. If a company does
not meet these conditions, it would be required to refund the amount of tax benefits, with
the addition of the consumer price index linkage adjustment and interest.

23

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The
Investment Center has granted approved enterprise status under Israeli law to an
investment program at our manufacturing facility in Tel Aviv and we have derived and
expect to continue to derive a substantial portion of our income from this program.
Additionally, an investment program at our former Jerusalem facility had been granted
approved enterprise status. Following the closing of the Jerusalem facility in 2001, we
received approval to transfer the approved enterprise program from Jerusalem to our Tel
Aviv facility. We have elected the alternative package of benefits under these approved
enterprise programs. Assuming there is no change in the applicable law, 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 and will
be subject to a reduced company tax of up to 25% for the subsequent period of five years,
or eight years if the percentage of non-Israeli investors who hold our ordinary shares
exceeds 25%. The benefits available to an approved enterprise program are dependent upon
the fulfillment of conditions stipulated in applicable law and in the certificate of
approval. The period of tax benefits for our approved enterprise programs has not yet
commenced, because we have yet to realize taxable income.

| | 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
Chief Scientist of the Israeli Ministry of Industry and Trade, pursuant to the Law for the
Encouragement of Industrial Research and Development, 1984, commonly referred to as the
R&D Law. Under the R&D Law, research and development plans that meet specified
criteria and are approved by a governmental research committee of the Office of the Chief
Scientist are eligible for grants generally of up to 50% of the research and development
expenditures, as determined by the research committee, in exchange for the payment of
royalties from the income derived from products or services using the technology or know
how developed under such plans programs. Regulations under the R&D Law generally
provide for the payment of royalties to the Chief Scientist of 3-5% on such income until
100% of the dollar-linked grant plus interest is repaid. If the plan does not generate any
revenues, the recipient of the grant would not be obligated to repay the grants received
under the plan. Following the full repayment of the grant, there is no further liability
for repayment, however, the recipient of the grants still remains obligated under other
requirements of the R&D Law.

The
terms of the grants from the Office of the Chief Scientist also require that the
manufacture of products developed under the funded plan be performed in Israel, unless
prior approval is received from the Office of the Chief Scientist. However, under the
regulations of the R&D Law, if any of the manufacturing is performed outside of
Israel, assuming we receive approval from the Chief Scientist for the foreign
manufacturing, we will be required to pay increased royalties. Such increased royalties
include an increased rate of royalties and an increase in their total amount. The
increased amount of the royalties depends upon the manufacturing volume that is performed
outside of Israel as follows:

|Manufacturing volume
outside of Israel | Royalties to the Chief Scientist
as a percentage of grant
|-------------------------------------- | ---------------------------------------------------------
|                                       |                                                          
|
|less than 50%                          | 120%                                                     
|between 50% and 90%                    | 150%                                                     
|more than 90%                          | 300%                                                     

The R&&D Law also provides that the technology and know-how developed with Chief Scientist grants may not be transferred
to third parties outside of Israel.  This prohibition, however, is not relevant for the export of any products developed
using the grants. Approval of the transfer of technology may be granted in specific circumstances to Israeli entities,
only if the recipient abides by the provisions of the R&D Law and related regulations, including the restrictions on the
transfer of technology and know-how and the obligation to pay royalties in an amount that may be increased.  We cannot
assure you that any consent, if requested, will be granted

Effective
for grants received from the Chief Scientist under programs approved after January 1,
1999, the outstanding balance of the dollar-linked grants will be also subject to interest
equal to the 12 month London interbank offered rate applicable to dollar deposits
that is published on the first business day of each calendar year. In November 2001, the
Israeli parliament approved an amendment to the R&D Law. The amendment became
effective on April 1, 2003.

24

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As
opposed to the R&D Law prior to the amendment, which requires an undertaking in the
application that all manufacturing will be performed in Israel, the amendment to the
R&D Law allows for the approval of new grants also in cases in which the applicant
declares that part of the manufacturing will not take place in Israel. This declaration is
required to include details regarding the locations in which the manufacture of the
product will be performed in Israel and out of Israel, the manufacture activities to be
performed in such locations (including the reasons for performing such manufacture
activities out of Israel) and the proportionate manufacturing expenditures in Israel and
out of Israel. This declaration will be a significant factor in the determination of the
Office of Chief Scientist whether to approve a plan and the amount and other terms of
benefits to be granted.

In
accordance with the amendment to the R&D Law, a plan will be approved if the applicant
is an Israeli corporation and as a result of the plan the applicant will develop in
Israel, by Israeli residents, a new product or a significant improvement to an existing
product, unless the Office of Chief Scientist is convinced that it is essential for the
execution of the plan that part of it will be performed out of Israel or by non-Israeli
residents.

The
amendment to the R&D Law adds reporting requirements with respect to certain changes
in the ownership of a grant recipient. The amendment requires the grant recipient and its
controlling shareholders and interested parties to notify the Office of the Chief
Scientist 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. 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 fifty percent (50%) or more of the means of control of a company.
Means of control refers to voting rights and the right to appoint directors or
the chief executive officer. An interested party of a company includes its
chief executive officer and directors, someone who has the right to appoint its chief
executive officer or at least one director, and a holder of twenty-five percent (25%) or
more of the companys outstanding equity or voting rights.

The
amendment to the R&D Law further allows the Office of Chief Scientist to provide
grants for portions of 20%, 30%, 40% and 50% of certain approved expenditures of a
research and development. The R&D Law prior to the amendment only allowed for grants
covering 50% of such expenditures. The amendment to the R&D Law and the available
budget of the Office of the Chief Scientist may affect the rate of additional grants that
may be requested by us in the future. Even if these grants are maintained, we cannot
assure you that we will receive Chief Scientist grants in the future. In addition, each
application to the Chief Scientist is reviewed separately, and grants are based on the
plan approved by the research committee. Generally, expenditures supported under other
incentive programs of the State of Israel are not eligible for grants from the Chief
Scientist. We cannot assure you that applications to the Chief Scientist will be approved
and, until approved, the amounts of any grants are not determinable.

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

Expenditures
not so approved are deductible over a three-year period. However, expenditures made out of
proceeds made available to us through government grants are not deductible according to
Israeli law.

25

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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:

| |  | deduction
of purchases of know-how and patents over an eight-year period for tax purposes;
| | - | ------------------------------------------------------------------------------------------

| |  | deduction
of specified expenses incurred for a public issuance of securities over a three-year
period                   for tax purposes;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------

| |  | 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
| | ---------------------------------------------------------------------

The
Income Tax Law (Inflationary Adjustments), 1985, generally referred to as the Inflationary
Adjustments Law, represents an attempt to overcome the problems presented to a traditional
tax system by an economy undergoing rapid inflation. The Inflationary Adjustments Law is
highly complex. Its features which are material to us can be described as follows:

There
is a special tax adjustment for the preservation of equity as follows:

| |  | Where
a companys equity, as calculated under the Inflationary Adjustments Law, exceeds
the depreciated cost of Fixed Assets (as defined in the Inflationary Adjustments Law), a
deduction from taxable income is permitted equal to the excess multiplied by the
applicable annual rate of inflation. The maximum deduction permitted in any single tax
year is 70% of taxable income, with the unused portion permitted to be carried forward.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Where
a companys depreciated cost of Fixed Assets exceeds its equity, then the excess
multiplied by the applicable annual rate of inflation is added to taxable income.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Subject
to specified limitations, depreciation deductions on Fixed Assets and losses carried
forward are adjusted for inflation based on the increase in the consumer price index.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Gains
on certain traded securities, which are taxed at a reduced tax rate following the Tax
Reform (and which were previously exempt from tax), are taxable at the companys tax
rate in specified circumstances.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

26

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Organizational
Structure

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

|Company                                  | Place of
Incorporation | Ownership
Interest | Function           
|---------------------------------------- | ---------------------- | ------------------ | -------------------
|Ceragon Networks do Brasil Limitada      | Brazil                 | 100%               | Sales and Marketing
|Ceragon Networks (UK) Limited            | England                | 100%               | Sales and Marketing
|Ceragon Networks SARL                    | France                 | 100%               | Sales and Marketing
|Ceragon Networks Gmbh                    | Germany                | 100%               | Sales and Marketing
|Ceragon Networks (HK) Limited            | Hong Kong              | 100%               | Sales and Marketing
|Ceragon Networks (India) Private Limited | India                  | 100%               | Sales and Marketing
|Ceragon Networks, S.A. de C.V            | Mexico                 | 100%               | Sales and Marketing
|Ceragon Networks, Inc.                   | New Jersey             | 100%               | Sales and Marketing

# Property, Plants and
Equipment

Our
corporate headquarters and principal administrative, finance, sales, marketing and
promotion, R&D, operations, and manufacturing are located at leased facility of
approximately 51,500 square feet in Tel Aviv, Israel. The lease for this facility expires
in May 2005. In addition to these properties, we lease approximately 4,000 square feet of
space in other adjacent and nearby buildings, the leases for which expire in 2003, to
provide space for our operations activities.

In
December 2000, we entered into a five year lease for approximately 52,110 square feet in
Tel Aviv. We have provided a bank guaranty to the landlord in the approximate amount of
$750,000 to guarantee our obligations pursuant to the lease. In 2001, we entered into a
two year sublease of this space to an unrelated third party, which was amended in 2003 and
extended in part until July 2004. This third party provided us with a $335,000 bank
guarantee to guaranty the obligations under the sublease. The term of the sublease and the
lease price per square foot of property is less than our current commitment under the
lease agreement with the landlord. As a result, we shall continue to have a nominal
monthly lease payment obligation throughout the term of the sublease. After the end of the
sublease period, our obligations for full payment of the lease amount shall resume. In
2002, we decided to pursue an early termination or modification of this lease. We do not
believe that the consequences, if any, from any such early termination or modification
will be material to our business operations.

In
the United States, we lease approximately 3,300 square feet in Mahwah, New Jersey expiring
in August 2003 for our North America headquarters. 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 France, Hong Kong,
Brazil, Mexico and India.

# 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 broadband wireless network equipment
for cellular operators, fixed operators (also known as incumbent operators) and private
networks (formerly referred to as enterprises).

27

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We
were incorporated and commenced operations in July 1996. We began selling our products in
the second half of 1998. Before that time, our operations consisted primarily of research
and development. Through December 2002, relatively few customers have accounted for a
large percentage of our revenues. We conduct our international sales and marketing
activities through nine wholly-owned subsidiaries.

A
majority of our revenues are generated, and a majority of our expenses are incurred, in
U.S. dollars and Euro. We use the dollar as our functional currency. Transactions and
balances in other currencies are converted into dollars according to the principles in
Financial Accounting Standards Board Statement No. 52. Gains and losses arising from
conversion are recorded as financial income or expense, as applicable. Our consolidated
financial statements are prepared in dollars and in accordance with U.S. GAAP.

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.

Revenues.
          We generate revenues from the sale of our products. We recognize revenues from
          the sale of our products in accordance with SEC Staff Accounting Bulletin Number
          101. We price our products on a per unit basis and primarily grant discounts
          based upon unit volumes. We sell our products directly and through distribution
          channels in North America, Europe, Middle East, Africa, Latin America and the
          Asia-Pacific region. In 2002, approximately 19.7% of our revenues were generated
          in North America, 63.0% were generated in Europe, Middle East, and Africa and
          17.3% were generated in the Asia-Pacific and Latin American regions.

Cost
of Revenues.Our cost of revenues consists of component and material costs, labor
costs, subcontractor fees, royalties, estimated warranty costs, overhead related to
manufacturing and depreciation of manufacturing equipment and paid or accrued royalties to
the Government of Israel in connection with grants we received from the Chief Scientist.
Our gross margin is affected by the selling prices for our products and the cost of
revenues.

Research
and Development Expenses.Our research and development expenses consist primarily of
compensation 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. Research and development expenses
are offset by royalty-bearing grants from the Chief Scientist. We believe continued
investment in research and development is essential to attaining our strategic objectives.

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

General
and Administrative Expenses.Our general and administrative expenses consist primarily
of salaries and related expenses for executive, accounting and human resources personnel,
professional fees, provisions for doubtful accounts and other general corporate expenses.

Amortization
of Deferred Stock Compensation.Amortization of deferred stock compensation results
from grants of stock options prior to our initial public offering with exercise prices per
share determined to be below the fair market value per share of our ordinary shares on the
dates of grant. The share-based compensation is amortized over the vesting period of the
individual options.

As
a result of options granted through December 31, 2002, we are required to recognize under
U.S. GAAP a total charge for amortization of deferred stock compensation of approximately
$23.0 million. We recognized approximately $21.1 million of such amount in the years 1997
through and including 2002 and expect to recognize approximately $1.4 million of such
amount in 2003, and the remaining balance in 2004 and 2005.

Non-Recurring
Expenses, Net. Non-recurring expenses, net, reflects restructuring charges with
respect to actions taken by us in accordance with a restructuring plan adopted by our
board of directors in 2001. It also reflects expense reserves related to an early
termination or modification of a secondary lease obligation with an unrelated party, which
we decided to pursue in 2002, and to income from the sale of raw materials to incidental
customers.

28

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Financial
Income, Net. Our financial income, net, consisted primarily of interest earned on bank
deposits, interest and investment income from various short-term and long-term financial
instruments, gains and losses from the conversion of monetary balance sheet items
denominated in non-dollar currencies into dollars.

Taxes.Israeli companies are generally subject to income tax at the rate of 36% and
          are subject to capital gains tax at a rate of 25% for capital gains derived
          after January 1, 2003. However, we benefit from preferential tax rates under the
          Law for the Encouragement of Capital Investments. Commencing the first year in
          which we earn taxable income, our approved enterprise status entitles us to tax
          exemptions on the portion of our income derived from our approved enterprise for
          two years, and taxation at a rate of 25% for between five to eight years
          thereafter. However, these benefits may not be applied to reduce the tax rate
          for any income derived by our non-Israeli subsidiaries.

# Results of Operations

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

|                                                | Year ended
December 31,
|----------------------------------------------- | -----------------------
|
|Revenues                                        | 100.0%                 
|Cost of revenues                                | 56.9                   
|                                                |                        
|Gross profit (loss)                             | 43.1                   
|                                                |                        
|Operating expenses                             
|Research and development                        | 33.9                   
|Less: Grants and participations                 | 7.6                    
|                                                |                        
|Research and development, net                   | 26.3                   
|Selling and marketing, net                      | 30.1                   
|General and administrative                      | 6.6                    
|Amortization of deferred stock compensation (a) | 32.6                   
|Non-recurring expenses, net                     | --                     
|                                                |                        
|Total operating expenses                        | 95.7                   
|                                                |                        
|Operating loss                                  | (52.6)                 
|Financial income, net                           | (8.5)                  
|                                                |                        
|Net loss                                        | (44.1)%                
|                                                |                        

|(a) | Amortization of deferred stock compensation relates to the following:
|--- | ---------------------------------------------------------------------

|                                                  | 2000  | 2001  | 2002 
|------------------------------------------------- | ----- | ----- | -----
|Cost of revenues                                  | 2.1%  | 1.6%  | 1.2% 
|Research and development expenses                 | 11.7% | 9.0%  | 5.2% 
|Selling and marketing expenses                    | 10.6% | 8.0%  | 5.8% 
|General and administrative expenses               | 8.3%  | 7.2%  | 4.0% 
|                                                  |       |       |      
|Total amortization of deferred stock compensation | 32.6% | 25.9% | 16.2%
|                                                  |       |       |      

29

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# Years Ended December 31,
2001 and 2002

Revenues.Revenues decreased from $24.9 million for the year ended December 31, 2001
          to $18.4 million for the year ended December 31, 2002, a decrease of $6.5
          million. This decrease was primarily attributable to decreased sales resulting
          from the telecommunications market downturn. However, quarterly revenues
          increased sequentially during 2002 from $3.3 million in the first quarter to
          $6.1 million in the fourth quarter. This increase was due to increased sales to
          fixed and cellular operators and private networks and to customers in
          diversified geographic markets.

Cost
of Revenues. Cost of revenues decreased from $45.3 million for the year ended
December 31, 2001 to $12.8 million for the year ended December 31, 2002, a decrease
of $32.5 million. This decrease was primarily attributable to an inventory write-down and
a fixed asset impairment charge in 2001, and to expense reduction measures implemented
throughout the Company in 2002.

Gross
profit (loss) as a percentage of revenues increased from (82.2)% for the year ended
December 31, 2001 to 30.4% for the year ended December 31, 2002. This increase was
primarily attributable to an inventory write-down and a fixed asset impairment charge in
2001, and to expense reduction measures implemented throughout the Company in 2002.

Research
and Development Expenses, Net. Research and development expenses, net decreased from
$10.3 million for the year ended December 31, 2001 to $7.3 million for the year ended
December 31, 2002, decrease of $3.0 million. This decrease was primarily due to decreases
in the number of our research and development personnel and in subcontractors
expenses. Research and development expenses were partially offset by royalty-bearing
grants from the Chief Scientist, which amounted to $2.7 million for the year ended
December 31, 2001 and $1.9 million for the year ended December 31, 2002.

Selling
and Marketing Expenses, Net.Selling and marketing expenses, net decreased from $11.9
million for the year ended December 31, 2001 to $9.1 million for the year ended
December 31, 2002, a decrease of $2.8 million. This decrease was primarily due
to expense reduction measures implemented throughout the Company as well as to changes in
the structure of our sales and marketing department.

General
and Administrative Expenses.General and administrative expenses decreased from $5.8
million for the year ended December 31, 2001 to $2.0 million for the year ended December
31, 2002, a decrease of $3.8 million. This decrease was due to bad debt recorded in 2001
and the implementation of expense reduction measures throughout the Company. The allowance
for doubtful debt as of December 31, 2002 was $500 thousand.

Amortization
of Deferred Stock Compensation.Amortization of deferred stock compensation decreased
from $6.4 million for the year ended December 31, 2001 to $3.0 million for the year ended
December 31, 2002, a decrease of $3.4 million. Amortization of deferred stock compensation
includes non-cash compensation expenses related to the cost of revenues of $400 thousand
for the year ended December 31, 2001 and $214 thousand for the year ended December 31,
2002; to research and development expenses of $2.2 million for the year ended December 31,
2001 and $958 thousand for the year ended December 31, 2002; to selling and marketing
expenses of $2.0 million for the year ended December 31, 2001 and $1.1 million for the
year ended December 31, 2002; and to general and administrative expenses of $1.8 million
for the year ending December 31, 2001 and $730 thousand for the year ending December 31,
2002.

Non-Recurring
Expenses, Net.Non-recurring expenses, net decreased from $4.8 million for the year
ended December 31, 2001 to $83 thousand for the year ended December 31, 2002.
Non-recurring expenses, net for the year ended December 31, 2001 relate to a plan of
restructuring approved by the Board in 2001 in light of the global economic slowdown.
Non-recurring expenses, net for the year ended December 31, 2002 reflect a non-recurring
expense reserve of $1.1 million related to an early termination or modification of a
secondary lease obligation with an unrelated party, which we decided to pursue in 2002. It
also reflects non-recurring income of $1.0 million related to the sale of raw materials to
incidental customers.

Net
Loss.Net loss decreased from $56.8 million for the year ended December 31, 2001 to
$14.4 million for the year ended December 31, 2002, a decrease of $42.4 million.

30

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# Years Ended December 31,
2000 and 2001

Revenues.Revenues decreased from $29.2 million for the year ended December 31, 2000
          to $24.9 million for the year ended December 31, 2001, a decrease of $4.3
          million. This decrease was primarily attributable to decreased sales resulting
          from the telecommunications market downturn which started in approximately March
          2001.

Cost
of Revenues. Cost of revenues increased from $16.6 million for the year ended
December 31, 2000 to $45.3 for the year ended December 31, 2001, an increase of $28.7
million. This increase was primarily attributable to an inventory write-down, a fixed
asset impairment charge, as well as lower production volumes and higher proportional
overhead costs.

Gross
profit (loss) as a percentage of revenues decreased from 43.1% for the year ended December
31, 2000 to (82.2)% for the year ended December 31, 2001. This decrease was primarily
attributable to an inventory write-down, a fixed asset impairment charge, as well as lower
production volumes and higher proportional overhead costs.

Research
and Development Expenses, Net. Research and development expenses, net increased from
$7.7 million for the year ended December 31, 2000 to $10.3 million for the year ended
December 31, 2001, an increase of $2.6 million. This increase was primarily due to
increases in the number of our research and development personnel and in
subcontractors expenses. Research and development expenses were partially offset by
royalty-bearing grants from the Chief Scientist, which amounted to $2.2 million for the
year ended December 31, 2000 and $2.7 million for the year ended December 31, 2001.

Selling
and Marketing Expenses, Net.Selling and marketing expenses, net increased from $8.8
million for the year ended December 31, 2000 to $11.9 million for the year ended
December 31, 2001, an increase of $3.1 million. This increase was primarily due
to our expenditures for our sales and marketing infrastructure. These expenditures
included increases in our sales, marketing and customer support personnel, opening new
offices, trade shows, traveling and other costs associated with sales and support
activities.

General
and Administrative Expenses.General and administrative expenses increased from $1.9
million for the year ended December 31, 2000 to $5.8 million for the year ended December
31, 2001, an increase of $3.9 million. This increase was due to bad debt recorded, and
increases in general and administrative personnel, professional services, and other
expenses. The allowance for doubtful debt as of December 31, 2001 was $450 thousand.

Amortization
of Deferred Stock Compensation.Amortization of deferred stock compensation decreased
from $9.5 million for the year ended December 31, 2000 to $6.4 million for the year ended
December 31, 2001, a decrease of $3.1 million. Amortization of deferred stock compensation
includes non-cash compensation expenses related to the cost of revenues of $603 thousand
for the year ended December 31, 2000 and $400 thousand for the year ended December 31,
2001; to research and development expenses of $3.4 million for the year ended December 31,
2000 and 2.2 million for the year ended December 31, 2001; to selling and marketing
expenses of $3.1 million for the year ended December 31, 2000 and $2.0 million for the
year ended December 31, 2001; and to general and administrative expenses of $2.4 million
for the year ending December 31, 2000 and $1.8 million for the year ending December 31,
2001.

Nonrecurring
Expenses, Net. Nonrecurring expenses, net increased from $0 for the year ended
December 31, 2000 to $4.7 million for the year ended December 31, 2001. This increase was
primarily due to restructuring pursuant to our plan in light of the global economic
slowdown.

Net
Loss.Net loss increased from $12.9 million for the year ended December 31, 2000 to
$56.8 million for the year ended December 31, 2001, an increase of $43.9 million.

31

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# 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, the rate of
devaluation of the NIS against the dollar, and the rate of inflation in Israel adjusted
for the devaluation:

|Year ended December 31, | Israeli inflation
rate % | NIS devaluation
rate % | Israeli inflation
adjusted for
devaluation %
|----------------------- | ------------------------ | ---------------------- | --------------------------------------------
|1998                    | 8.6                      | 17.6                   | (7.7)                                       
|1999                    | 1.3                      | (0.1)                  | 1.3                                         
|2000                    | 0.0                      | (2.7)                  | 2.8                                         
|2001                    | 1.4                      | 9.3                    | (7.2)                                       
|2002                    | 6.5                      | 7.3                    | 0.7                                         

A
devaluation of the NIS in relation to the dollar has the effect of reducing the dollar
amount of any of our expenses or liabilities that are payable in NIS, unless those
expenses or payables are linked to the dollar. This devaluation also has the effect of
decreasing the dollar value of any asset that consists of NIS or receivables payable in
NIS, unless the receivables 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 any unlinked NIS assets and the dollar amounts of any unlinked NIS liabilities and
expenses.

Because
exchange rates between the NIS and the dollar fluctuate continuously, with a historically
declining trend in the value of the NIS, exchange rate fluctuations, particularly larger
periodic devaluations, would have an impact on our results and period-to-period
comparisons of our results. The effects of foreign currency re-measurements are reported
in our consolidated financial statements of operations. For a discussion of our hedging
transactions, please see ITEM 11. Quantitative and Qualitative Disclosures about
Market Risk.

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

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

# Liquidity and Capital
Resources

Since
our inception, we have financed our operations primarily through private placements of
convertible debentures and preferred shares, royalty-bearing grants from the Chief
Scientist, borrowing from a related party, borrowings under our line of credit and from
proceeds of our initial public offering on the Nasdaq National Market in August 2000.
Through December 31, 2000, we raised $97.8 million in the initial public offering and an
additional $35.2 million from three private placements all of which in the aggregate
amount to a total of $133.0 million. We did not raise any capital during the fiscal years
2001 and 2002. Through December 31, 2002, we received a total of approximately $10.3
million from the Chief Scientist. Prior to fiscal year 2002, we borrowed approximately
$1.2 million from a related party which we repaid in August 2000 from the initial public
offering proceeds.

As
of December 31, 2002, we had approximately $43.2 million in cash and cash equivalents, bank deposits,
and marketable securities.

32

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As
of December 31, 2002, we had a $6 million line of credit from a leading Israeli bank, all
of which is currently undrawn. In consideration for this line of credit, we registered a
floating charge on all of our assets in favor of the bank. We also issued a warrant to the
bank to purchase our ordinary shares for an aggregate purchase price of up to $900
thousand. The bank exercised this warrant prior to our initial public offering.

Net
cash used in operating activities was approximately $25.8 million for the year ended
December 31, 2000, $24.1 million for the year ended December 31, 2001, and $10.0 million
for the year ended December 31, 2002. The decrease in 2002 in net cash used in operating
activities was primarily attributable to cash control efforts which were implemented as
part of the Companys expense reduction initiatives.

Net
cash provided by (used in) investing activities was $(15.0) million for the year ended
December 31, 2000, $(39.5) million for the year ended December 31, 2001, and $8.2 million
for the year ended December 31, 2002.

Net
cash provided by (used in) financing activities was $109.8 million for the year ended
December 31, 2000, $(37) thousand for the year ended December 31, 2001 and $33 thousand
for the year ended December 31, 2002. The cash provided by financing activities in the
years 2000 was attributable to proceeds from the issuance of preferred shares, and the
issuance of ordinary shares in our initial public offering.

As
of December 31, 2002, our principal commitments consisted of $2.4 million for obligations
outstanding under operating leases and $7.1 million of royalties payable to the Government
of Israel on revenues from product sales. We are also committed to pay royalties to a
subcontractor for the development of a component and its integration into one of our
products. The royalty rate on royalties payable to this subcontractor decreases on an
annual basis, at the rate of 4%, 3% and 2% of our revenues for the first, second and third
years of revenues, respectively, and 1% of our revenues for the fourth to seventh years of
revenues. This is the fifth year we have received revenues as of December 31, 2002 and we
currently pay royalties to this subcontractor at a rate of 1% of our collected revenue for
a specific product.

In
2001, we entered into agreements with 2 suppliers pursuant to which the Company was
initially committed to purchase certain products from these suppliers. The initial minimum
purchase commitments under these agreements were approximately $27 million.

In
2002, we entered into a supplementary arrangement with one of these suppliers in which all
minimum purchase commitments of the prior agreement were mutually rescinded. As a further
part of this arrangement, we issued a warrant to this supplier to purchase an aggregate of
seven hundred thousand (700,000) restricted Ordinary Shares with a par value of NIS 0.01
with an exercise price per Ordinary Share of US$0.003, subject to standard adjustments,
with a cash conversion alternative (instead of the exercise for shares) for eight hundred
seventy five thousand U.S. dollars (US$875,000).

Beginning
as of April 30, 2003 and expiring on October 31, 2004, the warrant may be exercised for
cash (in whole but not in part) payable in 6 equal monthly payments of $145,833.33.
Beginning as of September 30, 2003, the warrant may be exercised (in whole but not in
part) together with a cash payment of $0.003 per share, or by a net exercise purchase, for
700,000 restricted Ordinary Shares. Resale of such restricted Ordinary Shares by the
supplier are subject to Rule 144 of the Securities and Exchange Commission.

With
regard to the other supplier, in 2003, we entered into a supplementary arrangement whereby
we agreed to mutually rescind all prior minimum purchase commitments. We have further
agreed to purchase a minimum of approximately $3 million of products in 2003 for use in
the ordinary course of business, together with certain raw materials and work in process.
There are no further minimum purchase commitments with either of these suppliers.

Our
cash investments are comprised of the following: 10% consist of short term, highly liquid
investments with original maturities of less than three months, and 50% consist of short
term deposits and marketable securities with original maturities of up to 1 year, with an
average credit rating of at least AA/AA3. The 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/A2. All of these investments are in US dollars.

33

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We
believe that current cash and cash equivalent balances and cash flows from operations will
be sufficient for our present requirements.

Our
capital requirements are dependent on many factors, including market acceptance of our
products and the allocation of resources to our research and development efforts, as well
as our marketing and sales activities

# Capital Expenditures

We
have no current material commitments for capital expenditures.

# Research and Development

We place
considerable emphasis on research and development to expand the capabilities of our
existing products, to develop new products and to improve our existing technologies and
capabilities. 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, 2002, our research and development staff consisted of 79 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

In
early 2001, the global telecommunications industry, including in our principal geographic
markets, started to experience a slowdown, resulting in decreases and delays in the
procurement and deployment of new telecommunications equipment. Many industry players in
markets throughout the world have experienced, and are continuing to experience,
substantial declines in sales and revenues and have in many cases incurred significant
operating losses. Many have suspended purchasing new data communications or
telecommunications products or have ceased operations completely. Many of these companies
are no longer potential customers.

In
early 2001, our primary customers were competitive local exchange carriers, or CLECs,
primarily in the United States, as well as OEM customers. Beginning in the middle of 2001,
we made a strategic shift in focus with a new emphasis on cellular operators and an
expansion to geographic markets where we had not sold our products. At the same time, we
made a strategic decision to implement company-wide expense reduction measures, to
maintain reduced inventory levels, and to increase production efficiency.

As
a result of these strategic decisions, our revenues from cellular operators increased from
$1.1 million in 2001 to $7.6 million in 2002. In addition, in 2002 our revenues increased
sequentially quarter by quarter, together with our gross margins. Our revenues from fixed
operators have also increased during this period. We have seen pressure on our resale
prices in light of increased competition, together with an enhanced focus by our customers
on reducing their capital expenditures. However, because of our increasing focus on
efficiency and expense reductions, we do not believe that such price pressure will have a
material impact on our results of operations.

34

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Nevertheless,
due to continued uncertainty in the global telecommunications markets, we can not be
certain that we will be able to continue to penetrate cellular and fixed operators at
these levels. We also cannot be certain that the level of sequential quarterly revenue
growth will continue.

# Critical Accounting
Policies

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.

In
many cases, the accounting treatment of a particular transaction is specifically dictated
by U.S. GAAP and does not require managements judgment in its application. There are
also areas in which managements judgment in selecting among available alternatives
would produce a materially different result. The Companys management has reviewed
these critical accounting policies and related disclosures with the Audit Committee. 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;
| | - | --------------------

| |  | Accounting
for doubtful accounts and sales returns; and
| | - | -------------------------------------------------------

| |  | Inventory
valuation
| | - | -------------------

Revenue
recognition.We recognize product revenue in accordance with SEC Staff Accounting
Bulletin No. 101 Revenue Recognition in Financial Statements which is commonly
referred to as SAB 101, 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 defer revenues until the right of return expires. In contracts for which
acceptance procedures are required by the customer, we defer recognition of such revenues
until receiving the acceptance confirmation from the customer. Our typical product
warranty is between 12 to 24 months at no extra charge. All of our sales are final and the
only option in the event of a non-conformity of products with the warranty is repair or
replacement of the non-conforming products. We accrue for other allowances based on our
historical experience.

Accounting
for doubtful accounts and sales returns.We perform regular credit evaluations of our
customers financial condition. Allowance for doubtful accounts is computed for
specific debts, the collectibility of which is doubtful, based on the Companys
experience. In addition, we include a general provision for doubtful debts based on
managements past experience. If the historical data used to calculate these
estimates does not properly reflect future returns, additional provision for sales returns
may be required, and revenues in that period could be adversely affected.

Inventory
valuation. At each balance sheet date, we evaluate our inventory balance for excess
quantities and obsolescence. This evaluation includes an analysis of sales levels by
product and projections of future demand. In addition, we write off inventories that are
considered obsolete. Remaining inventory balances are adjusted to the lower of cost or
market value. 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 sales in the period the revision is made.

35

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# ITEM 6. DIRECTORS,
SENIOR MANAGEMENT AND EMPLOYEES

# Directors and Senior
Management

# MANAGEMENT

The
following table lists our current directors and executive officers:

|Name                  | Age | Position                                                                      
|--------------------- | --- | ------------------------------------------------------------------------------
|Zohar Zisapel         | 54  | Chairman of the Board of Directors                                            
|Shraga Katz           | 50  | Chief Executive Officer, President and Director                               
|Inon Beracha          | 40  | Chief Operating Officer and Executive Vice
President, Research and Development
|Ran Oz                | 36  | Chief Financial Officer                                                       
|Shlomo Tenenberg      | 48  | Executive Vice President, Worldwide Marketing and Sales                       
|Gil Feingold          | 43  | Executive Vice President, Worldwide Operations                                
|                      |     |                                                                               
|Sharon Ganot          | 34  | Vice President, Human Resources                                               
|Mitchell C. Shelowitz | 37  | General Counsel and Corporate Secretary                                       
|David Ackerman        | 46  | President of our U.S. subsidiary                                              
|                      |     |                                                                               
|Yael Langer           | 38  | Director                                                                      
|Zohar Gilon           | 55  | Director                                                                      
|Shmuel Levy           | 49  | Director                                                                      
|Joseph Atsmon         | 53  | 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 president from January 1982 until January 1998
and has served as chairman since 1998. Mr. Zisapel serves as a director of RIT
Technologies Ltd., Verisity Ltd., and several other private companies, and as chairman of
RADVision Ltd. and RADCOM Ltd. Mr. Zisapel previously served as head of the electronics
research department in the Israeli Ministry of Defense. Mr. Zisapel received B.Sc. and
M.Sc. in electrical engineering from the Technion, Israel Institute of Technology and an
M.B.A. from Tel Aviv University.

Shraga
Katz,our co-founder, has served as our president and chief executive officer since
July 1996. From April 1979 to April 1996, Mr. Katz served in the electronic research and
development department in the Israeli Ministry of Defense. From April 1993 to April 1996,
Mr. Katz served as the head of that department. Mr. Katz received a B.Sc. in electrical
engineering and electronics from the Technion, Israel Institute of Technology, and an
M.B.A. from Tel Aviv University.

Inon
Beracha,our co-founder, has served as our chief operating officer since December 2000
and our executive vice president of research and development since October, 2002. From
July 1996 until October, 2002 he was vice president of research and development. From
January 1985 April 1996, Mr. Beracha served in the electronic research and development
department in the Israeli Ministry of Defense. From March 1993 to April 1996, Mr. Beracha
served as the deputy head of that department. Mr. Beracha received a B.Sc. and an M.Sc. in
electrical engineering and electronics from Tel Aviv University.

36

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Ran
Ozhas served as our chief financial officer since September 2001. From 1995 until
2001, Mr. Oz was the general manager and chief financial officer of Jacada Ltd. From 1992
to 1994, Mr. Oz was associated with Somekh Chaikin as a certified public accountant. Mr.
Oz received a B.A. in economics and accounting and a Masters degree in business
administration and economics from the Hebrew University of Jerusalem.

Shlomo
Tenenberghas served as our executive vice president of 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.

Gil
Feingoldhas served as our executive vice president of worldwide operations since
October, 2002. From March 1998 until October, 2002, he served as our vice president of
operations. From March 1992 to March 1998, Mr. Feingold held logistics management and
engineering positions with Madge Networks Ltd. and Lannet Data Communications Ltd. From
October 1986 to March 1992, Mr. Feingold served as production engineer manager of Motorola
Communications Israel. Mr. Feingold received a B.Sc. in industrial engineering from the
Tel Aviv University and an M.B.A. from Bar Ilan University.

Sharon
Ganot has served as our vice president of 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.

Mitchell
C. Shelowitzhas served as our general counsel and corporate secretary since December
2000. From July 1999 until December 2000, Mr. Shelowitz was legal counsel at Gilat
Satellite Networks Ltd. Before that, Mr. Shelowitz was associated with the law firms of
Goldfarb, Levy, Eran & Co. (Tel Aviv) from 1997 to 1999, Nixon Peabody LLP (Garden
City, New York) from 1996 to 1997, and Proskauer Rose LLP (New York City) from 1991 to
1996. Mr. Shelowitz received a J.D. from Touro College, Jacob D. Fuchsberg Law Center and
received a B.A. in biology and business from the State University of New York at Albany.

David
Ackermanhas served as the president of our U.S. subsidiary since July 1999. Mr.
Ackerman founded DORNET Systems, a U.S. distributor for the RAD-BYNET group, and from
January 1998 to June 1999 served as the president of DORNET Systems. From March 1996 to
December 1997, Mr. Ackerman was the vice president of North American sales of RIT
Technologies Ltd., a member of the RAD-Bynet group. From February 1992 to March 1996, he
was a regional sales manager for RIT Technologies Ltd. Mr. Ackerman received a B.A. and an
M.B.A. from the University of Massachusetts.

Yael
Langerhas served as a director of our company 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 has an LL.B. from the
Hebrew University in Jerusalem.

Zohar
Gilonhas served as a director of our company since June 1999. Mr. Gilon is a general
partner and managing director of Tamar Technologies L.P., a venture capital fund based in
Israel, which was founded in 1998 together with C.E. Unterberg, Towbin. Mr. Gilon is a
private entrepreneur and has served as a director of AVT-Advanced Vision Technology Ltd.
since 1998, as well for companies in the RAD-BYNET group, including RADCOM Ltd. since
September 1995, RIT Technologies Ltd., since September 1995, and Silicom Ltd. since 1995.
Between November 1993 and June 1995, Mr. Gilon served as president of W.S.P. Capital
Holdings, an investment firm traded on the Tel Aviv Stock Exchange. Mr. Gilon received a
B.S.E.E. from the Technion, Israel Institute of Technology, and an M.B.A. from Tel Aviv
University. Mr. Gilon is one of our external directors under Israeli law and is one of our
independent directors under Nasdaq rules.

Shmuel
Levyhas served as a director of our company since June 2000. From December 2000, Mr.
Levy has been a partner at Sequoia Capital. From August 1998 until July 2000, Mr. Levy was
employed by Lucent Technologies Inc., where he was president, enterprise internetworking
systems. From June 1997 to July 1998, Mr. Levy was the president and chief executive
officer of Lannet Data Communications Ltd. From July 1992 to June 1997, Mr. Levy held
various executive positions with Madge Networks Ltd. and Lannet Data Communications. Mr.
Levy received a B.S. degree in electrical engineering from Ben Gurion University. Mr. Levy
is one of our external directors under Israeli law and is one of our independent directors
under Nasdaq rules.

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Joseph
Atsmonhas served as a director since July 12, 2001. He currently serves as a director
of Nice Ltd., a position he has held since July 2001. From April 1, 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 under Nasdaq rules.

# Compensation of
Directors and Executive Officers

The
following table presents all compensation we paid to all of our directors and executive
officers as a group for the year ended December 31, 2002. The table does not include any
amounts we paid to reimburse any of our affiliates 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 executive officers as a group, consisting of |                                         |                                               
|thirteen persons                                               | $920,000                                | $170,000                                      

As
of December 31, 2002, our directors and executive officers as a group, consisting of
thirteen persons, held options to purchase an aggregate of 2,741,250 ordinary shares. All
our officers work full time.

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
Affiliate Employees 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 six 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 these
directors holds office until the next annual general meeting of the shareholders. Our
external directors, currently Zohar Gilon and Shmuel Levy, each serve a three year term.
Zohar Gilons and Shmuel Levys terms will expire in February 2004.

38

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In
the event that 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
National Market we are required to comply with the rules of the U.S. Securities and
Exchange Commission and the Nasdaq National Market applicable to listed companies and the
Israeli Companies Law applicable to Israeli companies. Under Nasdaq National Market Rules,
we are required to appoint three independent directors and, under the Israeli Companies
Law, we are required to appoint two external directors.

Independent
Directors

The
independence standard under Nasdaq rules excludes any person who is a current or former
employee of a company or its affiliates as well as the immediate family members of an
executive officer of a company or its affiliates. Messrs. Zohar Gilon, Shmuel Levy, and
Joseph Atsmon currently serve as our independent directors.

External
Directors

We
are subject to the provisions of the new Israeli Companies Law, 5759-1999, which became
effective on February 1, 2000 and which supersedes most of the provisions of the
Israeli Companies Ordinance (New Version), 5743-1983. The Companies Law authorizes the
minister of justice to adopt regulations exempting from the provisions described below
companies whose shares are traded outside of Israel, such as Ceragon.

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 or had
during the two years preceding the date of appointment 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, excluding service as an office holder during the three month period
in which the company first offers its shares to the public.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------

The
Companies Law defines the term office holder of a company to include a
director, the chief executive officer, the chief financial officer and any manager of the
company that reports directly to the chief executive officer.

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 service as an
external director, or, if his or her position or other business might interfere with his
or her ability to serve as a director.

39

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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:

| |  | the
majority of the shares voted at the meeting, including 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 may be extended for an additional
three years. 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. Currently, Zohar Gilon and Shmuel Levy
serve as our external directors.

Audit
Committee

| | Nasdaq
Requirements
| | -------------------

Under
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 accounting
or related financial management expertise. The responsibilities of the audit committee
under Nasdaq rules include evaluating the independence of a companys outside
auditors. Currently, Messrs. Zohar Gilon, Shmuel Levy, and Joseph Atsmon serve on our
audit committee.

| | 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; and
| | - | -------------------------------------------

| |  | a
controlling party, or his or her relative, and any director employed by the company or
who provides               services to the company on a regular basis.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

The
duty of the audit committee is to identify irregularities in the business management of
the company 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 actions and
transactions with officer holders and interested parties.

The
composition of our Audit Committee satisfies both the Nasdaq National Market Rules and the
Israeli Companies Law requirements.

40

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| | Approval
of Certain Transactions
| | --------------------------------

The
approval of the audit committee is required under the Companies Law to effect specified
actions and exceptional 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 exceptional 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 has entered into any service contracts with its directors
that provide benefits upon termination of employment, except with regard to the president
and chief executive officer in his capacity as president and chief executive officer.

Share
Incentive Committee

Our
share incentive committee, which consists of Zohar Zisapel and Shraga Katz, administers
our key employee share incentive plan and our 2003 Share Option Plan, and makes
recommendations to our board of directors regarding issuances of options under these
plans.

Option
Committee

Our
option committee, which consists of Zohar Zisapel and Shraga Katz, administers our
affiliate employees option plan and makes recommendations to our board of directors
regarding issuances of options under the plan.

Dividends

The
board may declare dividends as it views justified, but the final dividend for any fiscal
quarter must be proposed by the board and approved by the shareholders. 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.

41

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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 duty 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 not be an interested party, an office holder or an affiliate, or
a relative of an interested party, an office holder or affiliate, 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.

Approval
of Specified Related Party Transactions Under Israeli Law

| | 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. An officer includes a director, the chief
executive officer, the chief financial officer and any other manager who reports directly
to the chief executive officer. 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.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.

42

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| | Disclosure
of Personal Interests of an Office Holder
| | ----------------------------------------------------

The
Companies Law requires that an office holder of a company promptly disclose, without
delay, 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, 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 an extraordinary transaction, which is considered at a meeting of the board of
directors or the audit committee, 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 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 power in a public company
(if no other shareholder owns more than 50% of the voting power in the company) or a
shareholder who has the ability to direct the actions of the company. Extraordinary
transactions of a public company with a controlling shareholder or in which a controlling
shareholder (including together with a third party) has a personal interest, and the terms
of compensation of a controlling shareholder who is an office holder, 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:

| |  | the
majority of shares voted at the meeting, including 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 of the election; or
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
total number of shares voted against the transaction by shareholders who have no personal
interest in the transaction does not exceed 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.

43

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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, provided that the articles of association allow it to do so.

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; 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 charge
from which he or she was acquitted; or a criminal charge 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.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

44

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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 Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act and is,
therefore, unenforceable.

Anti-Takeover
Provisions; Mergers and Acquisitions

The
Companies Law provides for mergers, provided that each party to the transaction obtains
the approval of its board of directors and shareholders. For purposes of the shareholder
vote of each party, unless a court rules otherwise, the merger will not be deemed approved
if a majority of the shares not held by the other party (or by any person who holds 25% or
more of the shares or the right to appoint 25% or more of the directors of the other
party) have voted 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 that party. Finally, a merger may not be completed
unless at least 70 days have passed from the time that the requisite proposals for
approval of the merger have been filed with the Israeli Registrar of Companies.

In
addition, provisions of the Companies Law that deal with arrangements between
a company and its shareholders may be used to effect squeeze-out transactions in which the
target company becomes a wholly-owned subsidiary of the acquirer. These provisions
generally require that the merger be approved by a majority of the participating
shareholders holding at least 75% of the shares voted on the matter. In addition to
shareholder approval, court approval of the transaction is required, which entails further
delay. The Companies Law also provides for a merger between Israeli companies, after
completion of the above procedure for an arrangement transaction and court
approval of the merger.

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% shareholder of the company. This rule does not apply if there is already another 25%
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% shareholder of the company, unless there is
already a majority shareholder of the company. The Israeli Minister of Justice has the
authority to adopt regulations exempting from these tender offer requirements companies
that are publicly traded outside Israel, such as our company. In any event, if as a result
of an acquisition of shares the acquirer will hold more than 90% of a companys
shares, the acquisition must be made by means of a tender offer for all of the shares. If
more than 95% of the outstanding shares are tendered in the tender offer, all the shares
that the acquirer offered to purchase will be transferred to it. 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 subject a shareholder who
exchanges his or her ordinary shares for shares in another corporation to taxation on half
the shareholders shares two years following the exchange and on the balance of the
shares four years thereafter even if the shareholder has not yet sold the shares.

# Employees

As
of December 31, 2002, we had 198 employees worldwide, of whom 79 were employed in research
and development, 54 in sales and marketing, 15 in management and administration and 50 in
operations. Of these employees, 166 were based in Israel, 12 were based in the United
States, 10 were based in Europe, and 10 were based in Latin America and Asia-Pacific. We
have employment agreements with all of our employees.

45

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---

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 ownership of our ordinary
shares by our directors and officers as of December 31, 2002. The percentage of
outstanding ordinary shares is based on 22,578,346 ordinary shares outstanding as of
December 31, 2002.

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.

|Name                                                | Number of Ordinary
Shares | Percentage of
Outstanding
Ordinary Shares
|--------------------------------------------------- | ------------------------- | -----------------------------------------
|Zohar Zisapel                                       | 2,885,250                 | 12.8%                                    
|Shraga Katz                                         | 1,075,916                 | 4.8%                                     
|Inon Beracha                                        | 548,500                   | 2.4%                                     
|All of directors and executive officers as a group,
|Consisting of thirteen people(1)                    | 5,117,682                 | 22.7%                                    

|(1) | Each of these directors and executive officers individually beneficially owns
          less than 1% of the outstanding shares, except Messrs. Zohar Zisapel, Shraga
          Katz, and Inon Beracha. These holdings do not include 816,250 ordinary shares
          held by Tamar Technologies L.P., a venture capital fund for which our director
          Zohar Gilon is a General Partner and Managing Director.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Stock Option Plans

Key
Employee Share Incentive Plan

In
August 1996, we adopted our key employee share incentive 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 committeenor 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 December 31, 2002:

46

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|Ordinary shares reserved
for option grants | Options outstanding | Weighted average
exercise price
|------------------------------------------ | ------------------- | -------------------------------
|9,464,000                                  | 5,509,583           | $     2.20                     

The 9,464,000 ordinary shares indicated in the table as having been reserved for option grants reflect
the total number of ordinary shares reserved for grants under this plan, our affiliate employees option plan and
our 2003 share option plan in the aggregate. Of the shares reserved for option grants, 825,000 were reserved by
the board of directors pursuant to a decision as of December 18, 2002, and are subject to approval by the
shareholders at the next annual general meeting.

| | Option
Trust
| | ------------

Under the plan, pursuant to Section 102 of the Israeli Tax Ordinance, all options, or shares issued upon
exercise of options, are held in trust and registered in the name of a trustee selected by the share incentive
committee.  The trustee may not release the options or ordinary shares to the holders of these options or shares
that are subject to the Israeli Tax Ordinance before the second anniversary of the registration of the options in
the name of the trustee. During this period, voting rights attached to the ordinary shares issued upon exercise
of the options may be exercised jointly by Yehuda Zisapel and Zohar Zisapel.

This restriction does not apply to employees that are not subject to the Israeli Tax Ordinance.  In
addition, pursuant to an amendment to the plan, based upon a tax ruling by the Israeli Tax Authority, option
holders that are subject to the Israeli Tax Ordinance have the ability to exercise vested options prior to the
conclusion of the two year period as long as:

| |  | all
shares arising out of the employee's exercise of options are sold immediately upon
exercise to an                   unrelated third party; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
employee exercising the options pays to the Israel Tax Authority a 50% tax on the net
revenue                   resulting from the exercise of options and the sale of shares.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Termination
and Amendment
| | -------------------------

Our  board of  directors  may  terminate  or 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.

Affiliate Employees Option Plan

In May 1997, we adopted our affiliate employees option 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 nor 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 December 31, 2002:

|Ordinary shares reserved
for option grants | Options outstanding | Weighted average
exercise price
|------------------------------------------ | ------------------- | -------------------------------
|9,464,000                                  | 795,950             | $     5.30                     

The 9,464,000 ordinary shares indicated in the table as having been reserved for option grants reflect
the total number of ordinary shares reserved for grants under this plan, our key employee share incentive plan
and our 2003 share option plan in the aggregate.  Of the shares reserved for option grants, 825,000 were reserved
by the board of directors pursuant to a decision as of December 18, 2002, and are subject to approval by the
shareholders at the next annual general meeting.

47

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The 2003 Share Option Plan

In April 2003, the Board of Directors adopted our 2003 Share Option Plan.   This plan complies with
recent changes in Israeli tax law 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.   We have submitted this plan for approval by the Israeli Tax Authority as is required by applicable
law.  We expect approval to be granted.  This plan shall be presented for approval at our next annual general
meeting of shareholders.

Ordinary shares reserved for option grants under the key employee share incentive plan and the affiliate
employees option plan that have not been issued thereunder may be issued pursuant to this plan.

ITEM 7.  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

Major Shareholders

The following table sets forth stock ownership information as of December 31, 2002 with respect to:

| | 1) | Each
person who is known by us to be the beneficial owner of more than 5% of our outstanding
                  ordinary shares; and
| | -- | -----------------------------------------------------------------------------------------------------------------------------------

| | 2) | All
the directors and executive officers.
| | -- | -----------------------------------------

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.

|Name                                                    | Number of Ordinary
Shares | Percentage of
Outstanding
Ordinary Shares(1)
|------------------------------------------------------- | ------------------------- | --------------------------------------------
|Zohar Zisapel(2)                                        | 2,885,250                 | 12.8%                                       
|Yehuda Zisapel(2)                                       | 2,838,000                 | 12.6%                                       
|HarbourVest International Private Equity Partners III -
|Direct Fund, L.P.(3)                                    | 1,565,750                 | 6.9%                                        
|Fidelity International Limited (4)                      | 2,069,300                 | 9.2%                                        
|Directors and Executive Officers as a group            
|(thirteen people) (5)                                   | 5,117,682                 | 22.7%                                       

48

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|(1) | Based on 22,578,346 Ordinary Shares issued and outstanding as of December 31,
          2002.
|--- | ---------------------------------------------------------------------------------------------

|(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. 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.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Fidelity International Limited is a Bermuda company, located at HM 670 Hamilton,
          HMCX, Bermuda. As of December 31, 2000, this shareholder did not maintain any
          significant holdings of Company shares. As of December 31, 2001, this
          shareholder held 8.6% of the Companys outstanding shares.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Each of these directors and executive officers individually beneficially own
          less than 1% of the outstanding shares, except Messrs. Zohar Zisapel, Shraga
          Katz, and Inon Beracha. These holdings do not include 816,250 ordinary shares
          held by Tamar Technologies L.P., a venture capital fund for which our director
          Zohar Gilon is a General Partner and Managing Director.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As of May 5, 2003, 62.40% of our
ordinary shares were held in the United States and 89 record holders were in the United
States.

# Related Party
Transactions

The RAD-BYNET Group of
Companies

Yehuda
Zisapel is a principal shareholder and Zohar Zisapel is a director and principal
shareholder of our company. They are brothers who, as of December 31, 2002, together
control 25.3% 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 Ltd.                     | Modules Inc.                        | RND Operation Services Ltd.
|Axerra Networks Inc.            | RADCOM Ltd.                         | RADView Software Ltd.      
|BYNET Data Communications Ltd.  | RAD Data Communications Ltd.        | RADVision Ltd.             
|BYNET Electronics Ltd.          | RADLAN Computer Communications Ltd. | RADWARE Ltd.               
|BYNET SEMECH (Outsourcing) Ltd. | SILICOM Ltd.                        | RADWIN Ltd.                
|BYNET Systems Applications Ltd. | SANRAD Inc.                         | RIT Technologies Ltd.      
|                                | Rad-Direct, Inc.                    | WISAIR Inc.                

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

Mr.
          Gilon, our director, also serves as a director of other companies in the
          RAD-BYNET group, including RADCOM Ltd., RIT Technologies Ltd. and SILICOM Ltd.
          Mr. Ackerman, the President of our U.S. subsidiary, founded and served in the
          past as President of DORNET Systems, a U.S. distributor for the RAD-BYNET group.
          Mr. Ackerman also served in the past as the vice president of North American
          sales of RIT Technologies.

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.

49

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Members
of the RAD-BYNET group provide us on an as-needed basis with finance, 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 $175 thousand in 2002.

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 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. This facility is approximately 51,500 square feet in size. The lease for
this facility will expire in May 2005, with options to renew for two additional one-year
periods. We also lease an additional 4,000 square feet in adjacent buildings from
companies controlled by Zohar Zisapel and Yehuda Zisapel. The aggregate amount of rent and
maintenance expenses related to these properties was approximately $1.1 million in 2002

Supply Arrangement

We
purchase components from RAD Data Communications Ltd. and other members of the RAD-BYNET
group which we integrate into our products. The aggregate purchase price of these
components was approximately $200 thousand for the year ended December 31, 2002.

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 has the right to make a single demand for
the registration of their ordinary shares outstanding at the time of the initial public
offering, provided that the demand covers shares representing a market value of at least
$4 million and does not include shares which may be sold without restriction within three
months from the date of the demand. These registration rights will be exercisable at any
time commencing on the first anniversary of the consummation of the initial public
offering for a period of three years, or, in specified cases, for a period of five years
thereafter. In addition, each of the shareholders has the right to have its ordinary
shares included in certain of our registration statements.

50

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Agreement with Our Chief
Executive Officer

In
July 1996, we entered into an agreement with Shraga Katz, pursuant to which he agreed to
serve as our chief executive officer for a period of no less than five years from July
1996. The agreement provides that Shraga Katz may not compete with us or disclose to third
parties information pertaining to our business for a period ranging from twelve to thirty
months from the date of termination of his employment, depending on the length of his term
of employment with us.

# 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.

# Export Sales

In
2002, 90% 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 the 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 change to Ceragons financial condition has occurred since the date of
the annual financial statements included herein.

# Corporate Tax Rate

Israeli
companies are generally subject to income tax at the rate of 36% and are subject to
capital gains tax at a rate of 25% for capital gains derived after January 1, 2003.
However, a program at our manufacturing facility in Tel Aviv has been granted approved
enterprise status under the Law for the Encouragement of Capital Investments, 1959. We are
entitled to a reduction in the normally applicable tax rate for income generated from this
program. Additionally, an investment program at our former Jerusalem facility had been
granted approved enterprise status. Although we closed the Jerusalem facility during 2001,
we received approval to transfer the approved enterprise program from Jerusalem to our Tel
Aviv facility later in 2001. Subject to compliance with applicable requirements, the
portion of income derived from an approved enterprise program investment is eligible for
the following tax benefits commencing in the first year in which it generates taxable
income:

51

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|Year after we    |                                                   
|---------------- | --------------------------------------------------
|begin generating
|taxable income   | Tax benefit                                       
|1-2              | Tax-exempt                                        
|3-7              | Corporate tax of up to 25%                        
|8-10             | Corporate tax of up to 25% if more than 25% of our
|                 | shares are held by non-Israeli investors          

We
have derived, and expect to continue to derive, a substantial portion of our revenues from
our approved enterprise program. The benefits available to an approved enterprise program
are described below. These benefits are dependent upon the fulfillment of conditions
stipulated in applicable law and in the certificate of approval. Because we have not
generated taxable income, the period of tax benefits for our existing approved enterprise
program has not yet commenced. After we begin to report taxable income and exhaust any net
operating loss carry-forwards, these benefits should result in recognized income from the
approved enterprise being tax exempt or taxed at a lower rate for a specified period.
However, these benefits may not be applied to reduce the tax rate for any income derived
by our non-Israeli subsidiaries.

The
portion of our income derived from our approved enterprise program at our manufacturing
facility in Tel Aviv will be exempt from tax for a period of two years commencing in the
first year in which we have taxable income and will be subject to a reduced company tax of
up to 25% for the subsequent period of five years, or eight years if the percentage of
non-Israeli investors who hold our ordinary shares exceeds 25%.

Until
December 31, 1998, our company was considered a family company for tax
purposes (according to Section 64A of the Israeli Income Tax Ordinance). Accordingly,
until December 31, 1998 our losses for tax purposes were assigned to our shareholders and
are not available to us.

As
of December 31, 2002, our net operating loss carry-forwards for Israeli income tax
purposes amounted to approximately $45 million. Under Israeli law, these net-operating
losses may be carried forward indefinitely and offset against future taxable income. We
have provided a valuation allowance for the full amount of the tax benefit derived from
these loss carry-forwards due to our history of operating losses and the uncertainty as to
when these benefits will be utilized. Deferred taxes in respect of other temporary
differences are immaterial.

As
of December 31, 2002, the net operating loss carry-forwards of our New Jersey subsidiary
for U.S. tax purposes amounted to approximately $5.5 million. These losses are available
to offset any future U.S. taxable income of our U.S. subsidiary and will expire during the
years 2019 to 2022.

# Government Grants

Our
research and development efforts have been financed through internal resources and grants
from the Chief Scientist. Under the Law for the Encouragement of Industrial Research and
Development, 1984, approved research and development plan are eligible for grants of up to
50% of the research and development expenditures if they meet certain criteria.

For
the years ended December 31, 2001 and 2002, the Chief Scientist provided grants for
research and development expenditures of approximately $2.7 million and $1.9 million,
representing 21% and 21% of our total research and development expenses in each of these
respective periods. We expect that the Chief Scientist grants will be maintained at the
same approximate percentage of our total research and development expenses in the short
term.

We
pay royalties to the Chief Scientist only if the project yields revenues. The royalty
rates are 3% of sales in the first three years of sales and were recently changed to 3.5%
thereafter (instead of 4% in the next three years and 5% thereafter), up to the repayment
of 100% of the received grants. For grants received under plans approved subsequent to
January 1, 1999, the maximum payment is 100% of the dollar-linked grant amount plus
interest at LIBOR rates. Our total obligation for royalties to the Chief Scientist for
grants received or accrued, net of royalties paid, or accrued, amounted to approximately
$7.1 million as of December 31, 2002.

52

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For
the last three years, we have paid or accrued royalties to the Chief Scientist as follows:

|                             | Royalties paid or accrued
(In thousands)
|---------------------------- | ----------------------------------------
|Year ended December 31, 2000 | $876                                    
|Year ended December 31, 2001 | $778                                    
|Year ended December 31, 2002 | $613                                    

The
manufacturing of products developed with Chief Scientist grants must be performed in
Israel. However, subject to the Chief Scientists approval, manufacturing may be
performed outside of Israel if the company pays increased royalties and receives approval
in advance. Such increased royalties are also based on the amount of manufacturing
performed outside of Israel.

The
Government of Israel, through its Fund for the Encouragement of Marketing Activities,
awards grants to Israeli companies for overseas marketing expenses, including expenses for
maintaining branches, advertising, catalogs, exhibitions and surveys, up to a maximum rate
of 30% of these expenses, not to exceed $1.0 million annually. In 1999, we received grants
from the marketing fund totaling approximately $50 thousand. As of December 31, 2002,
we had no liability to the Government of Israel for grants received from the marketing
fund.

We
submitted a marketing plan that was approved in May 2000. Under this program, we received
grants totaling $180 thousand in 2001. In respect of this grant, we are required to pay a
royalty at the rate of 4% of the total increase in export sales, up to the total amount of
the grant received, commencing on January 1, 2003. As of December 31, 2002, we were
obligated to repay a total of $180 thousand to the Government of Israel for grants
received from the marketing fund utilizing this royalty mechanism.

53

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# ITEM 9: THE OFFER AND
LISTING

Our
ordinary shares are listed on the Nasdaq National Market since August 4, 2000.

The
table below sets forth for the periods indicated the high and low last reported prices of
the ordinary shares as reported on Nasdaq since August 4, 2000.

|                                          | Ordinary Shares
|----------------------------------------- | ---------------
|
|Year Ending December 31, 2000             |                
|                                          |                
|August 4, 2000 through December 31, 2000: |                
|                                          | 32.00          
|                                          |                
|August 4, 2000 through September 30, 2000 | 32.00          
|Fourth Quarter                            | 24.75          
|                                          |                
|Year Ending December 31, 2001:           
|                                          |                
|First Quarter                             | 19.31          
|Second Quarter                            | 5.97           
|Third Quarter                             | 3.30           
|Fourth Quarter                            | 4.49           
|                                          |                
|Year Ending December 31, 2002:           
|                                          |                
|First Quarter                             | 4.55           
|Second Quarter                            | 3.00           
|Third Quarter                             | 1.63           
|Fourth Quarter                            | 1.39           
|                                          |                
|Most Recent Six Months:                  
|                                          |                
|November                                  | 1.39           
|December                                  | 1.31           
|January                                   | 1.56           
|February                                  | 1.46           
|March                                     | 1.51           
|April                                     | 2.10           

As
of May 23, 2003, the last reported price of one of our ordinary shares on the Nasdaq
National Market was $2.58.

54

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# 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.

# Material Contracts

None.

# Exchange Controls

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

# 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.

Israeli Capital Gains Tax
on Sales of Shares

Israeli
law imposes a capital gains tax on the sale of capital assets located in Israel, including
shares in Israeli companies, by both residents and 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 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. Capital gains (other than gains deriving from
the sale of listed securities) derived after January 1, 2003 are taxed at a rate of 25%
for both individuals and corporations. Regarding assets acquired prior to January 1, 2003
the tax rate of 25% will apply to a proportionate part of the gain in accordance with the
holding periods of the Asset, before and after January 1, 2003 on a linear basis.

Prior
to the Tax Reform, sales of our ordinary shares by individuals were generally exempted
from Israeli capital gains tax for so long as they were quoted on Nasdaq or listed on a
stock exchange in specified countries and we qualified as an industrial company.

Pursuant
to the Tax Reform, generally, capital gains tax is imposed at a rate of 15% on real gains
derived on or after January 1, 2003, from the sale of shares in companies
(i) publicly traded on the Tel Aviv Stock Exchange (TASE) or; (ii)
(subject to a necessary determination by the Israeli Minister of Finance) Israeli
companies publicly traded on a recognized stock exchange or regulated market outside of
Israel (such as us). This tax rate is contingent upon the shareholder not claiming a
deduction for financing expenses and does not apply to: (i) dealers in securities;
(ii) shareholders that report in accordance with the Inflationary Adjustment Law; or
(iii) shareholders who acquired their shares prior to an initial public offering
(that are subject to a different tax arrangement). The tax basis of 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.

55

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

In any event, the provisions of the
Tax Reform shall not effect the exemption from capital gains tax for gains accrued before
January 1, 2003, as described above.

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, Israeli
capital gains tax will not apply to the sale, exchange or disposition of ordinary shares
by a person:

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

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

However,
this exemption will not apply if 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. 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 generally. The U.S.-Israel tax treaty does not relate to U.S. state or
local taxes.

Israeli Taxation of
Non-Resident Holders of 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 the
source. Unless a different rate is provided in a treaty between Israel and the
shareholders country of residence, the withholding rate is as follows:

|    | Dividends not generated by an approved enterprise
|--- | -------------------------------------------------
|
|15% | 12.5%                                            

Under
an amendment to the Inflationary Adjustments Law, non-Israeli corporations might be
subject to Israeli taxes on the sale of traded securities of an Israeli company, subject
to the provisions of any applicable double taxation treaty.

56

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Israeli Foreign Exchange
Regulations

We
are permitted to pay in Israeli and non-Israeli currency:

| |  | dividends
to holders of our ordinary shares; and
| | - | ------------------------------------------------

| |  | any
amounts payable to the holders of our ordinary shares upon our dissolution, liquidation
or winding                   up.
| | - | ----------------------------------------------------------------------------------------------------------------------------

If
we make any payments in Israeli currency, the payments may be converted into freely
repatriable dollars at the rate of exchange prevailing at the time of conversion.

U.S. Federal Income Tax
Considerations

Subject
to the limitations described in the following paragraphs, the discussion below describes
the material U.S. federal income tax consequences to a holder of our ordinary shares,
referred to in this discussion as a U.S. holder, that is:

| |  | an
individual who is a citizen or resident of the United States,
| | - | ----------------------------------------------------------------

| |  | a
corporation (or other entity treated as a corporation for U.S. federal tax purposes)
created or                   organized in the United States or under the laws of the
United States or of any state or                   the District of Columbia,
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | a
partnership (or other entity treated as a partnership for U.S. federal tax purposes)
created or                   organized in the United States or under the laws of the
United States or of any state or                   the District of Columbia, expect as
otherwise provided by future Treasury regulations,
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | an
estate, the income of which is includible in gross income for U.S. federal income tax
purposes                   regardless of its source, or
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------

| |  | a
trust, if a court within the United States is able to exercise primary supervision over
the                   administration of the trust and one or more U.S. persons have the
authority to control all                   substantial decisions of the trust.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

This
summary is not a comprehensive description of all of the tax considerations that may be
relevant to each persons decision to purchase ordinary shares. This summary
considers only U.S. holders that will own ordinary shares as capital assets.

This
discussion is based on current provisions of the Internal Revenue Code of 1986, 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 shareholder based on the shareholder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;
| | - | -----------------------------

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

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

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

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

57

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In
addition, this discussion does not address any aspect of state, local or non-U.S. tax
laws, nor the possible application of the U.S. federal estate or gift tax or any state
inheritance, estate or gift tax.

Material
aspects of U.S. federal income tax relevant to a holder other than a U.S. holder referred
to in this discussion as a non-U.S. holder, are also discussed below.

Each prospective investor is
advised to consult his or her own tax advisor for the specific tax consequences to him or
her of purchasing, holding or disposing of our ordinary shares.

Taxation of Dividends
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
ordinary income the amount of any distribution paid on ordinary shares, including any
Israeli 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. These distributions will be foreign
source passive income (or in some cases, financial services income) for U.S. foreign tax
credit purposes and will not be eligible for the dividends received deduction otherwise
available to corporations. Distributions in excess of earnings and profits will be applied
against and will reduce the U.S. holders basis in the ordinary shares and, to the
extent in excess of that basis, will be treated as gain from the sale or exchange of
ordinary shares.

Distributions
of current or accumulated earnings and profits paid in foreign currency to a U.S. holder
will be includible in the income of a U.S. holder in a U.S. dollar amount calculated by
reference to the exchange rate on the day the distribution is received. A U.S. holder that
receives a foreign currency distribution and converts the foreign currency into U.S.
dollars after receipt will have foreign exchange gain or loss based on any appreciation or
depreciation in the value of the foreign currency against the U.S. 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 Israeli 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 Israeli
          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 foreign
          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 the provisions described in the
          following paragraphs as well as rules which limit foreign tax credits allowable
          for specific classes of income to the U.S. federal income taxes otherwise
          payable on each 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 foreign source taxable income.

A
U.S. holder will be denied a foreign tax credit for Israeli income tax withheld from
dividends received on the ordinary shares:

| |  | if
the U.S. holder has not held the ordinary shares for at least 16 days of the 30 day
period beginning                   on the date which is 15 days before the ex-dividend
date; or
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | to
the extent the U.S. holder is under an obligation to make related payments on
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 16 day holding period required by
the statute.

58

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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 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 shares, and the amount realized on the disposition. A disposition
of shares will be considered to occur on the trade date, regardless of the holders
method of accounting. Capital gain from the sale, exchange or other disposition of
ordinary shares held more than one year is long-term capital gain, and is eligible for a
reduced rate of taxation in the case of individuals. Gain or loss recognized by a U.S.
holder on a sale, exchange or other disposition of ordinary shares generally will 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 U.S. 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. The 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 U.S. dollars after receipt will have foreign exchange gain or loss based on any
appreciation or depreciation in the value of the foreign currency against the U.S. dollar,
which will generally be U.S. source ordinary income or loss.

Tax Consequences if We
Are a Passive Foreign Investment Company

We
will be a passive foreign investment company, or PFIC, if 75% or more of our gross income
in a taxable year, including the pro rata share of the gross income of any U.S. or foreign
corporation, in which we are considered to own 25% or more of the shares by value, is
passive income. Alternatively, we will be considered to be a PFIC if at least 50% of our
assets in a taxable year, ordinarily determined based on the average fair market value of
our assets over the taxable year and including the pro rata share of the assets of any
company in which we are considered to own 25% or more of the shares by value, produce or
are held for the production of passive income.

If
we were a PFIC, and a U.S. holder did not make an election to treat us as a qualified
electing fund as described below, excess distributions by us to a U.S. holder would be
taxed in a special way. Excess distributions are amounts received by a U.S. holder on
shares in a PFIC in any taxable year that exceed 125% of the average distributions
received by the U.S. holder from the PFIC in the shorter of:

| |  | the
three previous years; or
| | - | ----------------------------

| |  | the
U.S. holder's holding period for ordinary shares before the present taxable year.
| | - | -------------------------------------------------------------------------------------

Excess
distributions must be allocated ratably to each day after 1986 that a U.S. holder has held
shares in a PFIC. A U.S. holder would then be required to include amounts allocated to the
current taxable year in its gross income as ordinary income for that year. Further, a U.S.
holder would be required to pay tax on amounts allocated to each prior taxable year at the
highest rate in effect for that year on ordinary income and the tax would be subject to an
interest charge at the rate applicable to deficiencies for income tax.

The
entire amount of gain that is realized by a U.S. holder upon the sale or other disposition
of ordinary shares will also be treated as an excess distribution and will be subject to
tax as described above.

In
some circumstances a U.S. holders tax basis in our ordinary shares that were
inherited from a deceased person who was a U.S. holder would not equal the fair market
value of those ordinary shares as of the date of the deceaseds death but would
instead be equal to the deceaseds basis, if lower.

59

---

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The
special PFIC rules described above will not apply to a U.S. holder if that U.S. holder
makes an election to treat us as a qualified electing fund in the first taxable year in
which the U.S. holder owns ordinary shares and if we comply with specified reporting
requirements. Instead, a U.S. holder having made a qualified electing fund election, or
QEF election, is required for each taxable year to include in income a pro rata share of
the ordinary earnings of the qualified electing fund as ordinary income and a pro rata
share of the net capital gain of the qualified electing fund as long-term capital gain,
subject to a separate election to defer payment of taxes. If deferred, the taxes will be
subject to an interest charge. We would supply U.S. holders with the information needed to
report income and gain under a QEF election if we were classified as a PFIC.

The
QEF election is made on a shareholder-by-shareholder basis and can be revoked only with
the consent of the Internal Revenue Service, or IRS. A shareholder makes a QEF election by
attaching a completed IRS Form 8621, including the PFIC annual information statement,
to a timely filed U.S. federal income tax return and by filing a copy of the form with the
IRS Service Center in Philadelphia, Pennsylvania. Even if a QEF election is not made, a
shareholder in a PFIC who is a U.S. person must file a completed IRS Form 8621 every
year.

A
U.S. holder of PFIC shares which are publicly traded may elect to mark the stock to market
annually, recognizing as ordinary income or loss each year an amount equal to the
difference as of the close of the taxable year between the fair market value of the PFIC
shares and the U.S. holders adjusted tax basis in the PFIC shares. Losses would be
allowed only to the extent of net mark-to-market gain previously included by the U.S.
holder under the election for prior taxable years. If the mark-to-market election were
made, then the rules described above would not apply for periods covered by the election.

Although
we do not believe that we were a PFIC in 2002, there can be no assurance that the IRS will
agree with that conclusion or that we will not become a PFIC in 2003 or in a subsequent
year. 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. U.S. holders who hold ordinary shares during a period when we are a PFIC
will be subject to these rules, even if we cease to be a PFIC, subject to specified
exceptions for U.S. holders who made a QEF election. U.S. holders are urged to consult
their tax advisors about the PFIC rules, including QEF and mark-to-market elections.

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,
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:
| | - | --------------------------------------------------------------------------------------------------------------------------------------------

| | (i) | 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
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------

| | (ii) | in
the case of an individual, the item is attributable to a fixed place of
          business in the United States;
| | ---- | -------------------------------------------------------------------------------------------------------------------

| |  | 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 does not                   qualify for an exemption; or
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
non-U.S. holder is subject to tax under the provisions of U.S. tax law applicable to U.S.
                  expatriates.
| | - | ----------------------------------------------------------------------------------------------------------------------------

60

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Information Reporting and
Back-up Withholding

U.S.
          holders generally are subject to information reporting requirements for
          dividends paid in the United States on ordinary shares. Dividends paid in the
          United States to a U.S. holder on ordinary shares are subject to back-up
          withholding at a rate of 30% unless the U.S. holder provides IRS Form W-9 or
          establishes an exemption. U.S. holders generally are subject to information
          reporting and back-up withholding at a rate of 30% on proceeds paid from the
          disposition of ordinary shares unless the U.S. holder provides IRS Form W-9
          or establishes an exemption.

Non-U.S.
          holders generally are not subject to information reporting or back-up
          withholding for dividends paid on, or upon the disposition of, 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.

The
amount of any back-up withholding will be allowed as a credit against a U.S. or non-U.S.
holders U.S. federal income tax liability and may entitle the holder to a refund,
provided that required information is furnished to the Internal Revenue Service.

# Documents on Display

We
file reports and other information 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 at 450
Fifth Street, Washington D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. You may also visit us on the World Wide Web at
www.ceragon.com.

# 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 further described below.

We
are exposed to financial market risk associated with changes in foreign currency exchange
rates. The majority of our revenue and expenses are transacted in U.S. dollars. A portion
of our expenses and revenues, however, are denominated in New Israeli Shekels, Euros,
British pounds, and other foreign currencies. During 2002, in order to protect against the
volatility of future cash flows caused by changes in foreign currency exchange rates, we
used forward contracts to hedge material amounts. As of year end, the outstanding balance
of the forward contracts was immaterial.

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.

As
of December 31, 2002, we had no other exposure to changes in interest rates and had no
interest rate derivative financial instruments outstanding.

ITEM 12. DESCRIPTION OF
SECURITIES OTHER THAN EQUITY SECURITIES.

# Not applicable

61

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# PART II

# ITEM 13. DEFAULTS,
DIVIDEND ARREARAGES AND DELINQUENCIES.

# Not applicable

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

# Use of Proceeds

As
of December 31, 2002, approximately 63% of the net offering proceeds from our initial
public offering were invested in short term investments. The remaining 37% of the net
offering proceeds were invested in long term investments. During fiscal year 2002, we used
$0.4 million of the net offering proceeds on capital expenditures, including manufacturing
equipment, research equipment and leasehold improvements.

# ITEM 15. Controls and
Procedures

# Disclosure Controls and
Procedures

Within
90 days prior to the filing date of this Annual Report on Form 20-F, the Chief Executive
Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the
Companys disclosure controls and procedures as defined in Exchange Act Rule 13a-14.
Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that the Companys current disclosure controls and procedures are effective
to ensure that information required to be disclosed by the Company in reports that it
files or submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules and forms.

# Internal Controls

There
have been no significant changes in the Companys internal controls or in other
factors that could significantly affect these controls subsequent to the date of the most
recent evaluation by the Chief Executive Officer and Chief Financial Officer.

The
design of any system of controls and procedures is based in part upon certain assumptions
about the likelihood of future events. There can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions, regardless of
how remote.

# ITEM 16. [RESERVED]

62

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# 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-24 hereof.

# ITEM 19. EXHIBITS

|(a) | Index to Consolidated Financial Statements                                                 | PAGE
|--- | ------------------------------------------------------------------------------------------ | ----
|    | Reports of Independent Auditors and Independent Public Accountants                         | F-2 
|    | Consolidated Balance Sheets at December 31, 2002 and 2001                                  | F-4 
|    | Consolidated Statements of Operations for the Years Ended December 31, 2002, 2001 and 2000 | F-6 
|    | Statements of Changes in Shareholders' Equity for the Years Ended December 31,            
|    | 2002, 2001 and 2000                                                                        | F-7 
|    | Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000 | F-8 
|    | Notes to Consolidated Financial Statements                                                 | F-9 

|(b) | Exhibits
|--- | --------

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

|1.2 | Articles
of Association**
|--- | -------------------------

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

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

|10.1 | Consent of Independent Auditors
|---- | -------------------------------

|10.2 | 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 3.2
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.

63

---

---

# CERAGON NETWORKS LTD.
AND ITS SUBSIDIARIES

# CONSOLIDATED FINANCIAL
STATEMENTS

# AS OF DECEMBER 31, 2002

# IN U.S. DOLLARS

# INDEX

|                                                                   |         
|------------------------------------------------------------------ | --------
|                                                                   | Page    
|Reports of Independent Auditors and Independent Public Accountants | F2-F3   
|Consolidated Balance Sheets                                        | F4 - F5 
|Consolidated Statements of Operations                              | F6      
|Statements of Changes in Shareholders' Equity                      | F7      
|Consolidated Statements of Cash Flows                              | F8      
|Notes to the Consolidated Financial Statements                     | F9 - F30



---

---

ERNST & YOUNG

# REPORT OF INDEPENDENT
AUDITORS

# To the Shareholders of

# CERAGON NETWORKS LTD. AND
ITS SUBSIDIARIES

We
have audited the accompanying consolidated balance sheet of Ceragon Networks Ltd.
(the Company) and its subsidiaries as of December 31, 2002, and the related
consolidated statements of operations, changes in shareholders equity and cash flows
for the year then ended. 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 audit.

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

In
our opinion, based on our audit, 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, 2002, and the consolidated results of
their operations and cash flows for the year ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States.

|Tel-Aviv, IsraelFebruary 6, 2003 |  | /s/ KOST FORER & GABBAY
KOST FORER & GABBAY A Member of Ernst & Young Global
|-------------------------------- |  | ------------------------------------------------------------------------------------------

F-2

---

---

This is a copy of the previously
issued Independent Public Accountants report of Arthur Andersen. The report has not
been reissued by Arthur Andersen.

# REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTS

To the Shareholders of

# CERAGON NETWORKS LTD.

We have audited the accompanying
consolidated balance sheets of Ceragon Networks Ltd. and its subsidiaries as of December
31, 2001 and 2000 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, 2001. 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 auditing standards generally accepted in the United States and Israel, including
those prescribed under the Auditors Regulations (Auditors Mode of
Performance), 1973. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the
consolidated financial position of Ceragon Networks Ltd. and its subsidiaries as of
December 31, 2001 and 2000, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States.

| |  | /s/ Luboshitz KasiererLuboshitz Kasierer  Arthur Andersen
| |  | -----------------------------------------------------------------------

Tel-Aviv, IsraelJanuary 31, 2002

F-3

---

---

# CERAGON NETWORKS LTD.
AND ITS SUBSIDIARIES

# CONSOLIDATED BALANCE
SHEETS

---

# U.S. dollars in thousands

|                                                             |   | December 31,
|------------------------------------------------------------ | - | ------------
|
|ASSETS                                                       |   |             
|                                                             |   |             
|CURRENT ASSETS:                                             
|                                                             |   |             
|Cash and cash equivalents                                    |   | $   6,421   
|Short-term bank deposits                                     |   | 26,741      
|Marketable securities                                        | 3 | 19,813      
|Trade receivables (net of allowance for doubtful accounts of
|$ 450 and $ 500 at December 31, 2001 and 2002, respectively) |   | 2,822       
|Other accounts receivable and prepaid expenses               | 4 | 2,143       
|Inventories                                                  | 5 | 7,377       
|                                                             |   |             
|                                                             |   |             
|Totalcurrent assets                                          |   | 65,317      
|                                                             |   |             
|                                                             |   |             
|LONG-TERM INVESTMENTS:                                      
|                                                             |   |             
|Long-term bank deposit                                       |   | -           
|Long-term marketable securities                              | 3 | 746         
|Severance pay fund                                           |   | 930         
|                                                             |   |             
|Totallong-term investments                                   |   | 1,676       
|                                                             |   |             
|                                                             |   |             
|PROPERTY AND EQUIPMENT, NET                                  | 6 | 5,093       
|                                                             |   |             
|                                                             |   |             
|Totalassets                                                  |   | $ 72,086    
|                                                             |   |             

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

F-4

---

---

# CERAGON NETWORKS LTD.
AND ITS SUBSIDIARIES

# CONSOLIDATED BALANCE
SHEETS

---

# U.S. dollars in
thousands (except share data)

|                                                           |   | December 31,
|---------------------------------------------------------- | - | ------------
|
|LIABILITIES AND SHAREHOLDERS' EQUITY                       |   |             
|                                                           |   |             
|CURRENT LIABILITIES:                                      
|                                                           |   |             
|Trade payables                                             |   | $     5,040 
|Other accounts payables and accrued expenses               | 7 | 4,916       
|                                                           |   |             
|                                                           |   |             
|Totalcurrent liabilities                                   |   | 9,956       
|                                                           |   |             
|                                                           |   |             
|ACCRUED SEVERANCE PAY                                      |   | 1,511       
|                                                           |   |             
|                                                           |   |             
|COMMITMENTS AND CONTINGENT LIABILITIES                     | 8 |             
|                                                           |   |             
|SHAREHOLDERS' EQUITY:                                      | 9 |             
|Share capital:                                            
|Ordinary shares of NIS 0.01 par value:                    
|Authorized  - 40,000,000 shares as of December 31, 2001   
|and 2002; Issued and outstanding 22,165,196 and 22,578,346
|shares as of December 31, 2001 and 2002, respectively      |   | 56          
|Additional paid-in capital                                 |   | 169,355     
|Deferred stock compensation                                |   | (4,848)     
|Accumulated deficit                                        |   | (103,944)   
|                                                           |   |             
|                                                           |   |             
|Totalshareholders' equity                                  |   | 60,619      
|                                                           |   |             
|                                                           |   |             
|Totalliabilities and shareholders' equity                  |   | $   72,086  
|                                                           |   |             

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

|February 6, 2002
_________________________
    Date of approval of the
     Financial statements | /s/ Shraga Katz
_________________________
        SHRAGA KATZ
  Chief Executive Officer | /s/ Ran Oz
_________________________
           RAN OZ
   Chief Financial Officer
|------------------------------------------------------------------------------------------------ | --------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------

F-5

---

---

# CERAGON NETWORKS LTD.
AND ITS SUBSIDIARIES

# CONSOLIDATED STATEMENTS
OF OPERATIONS

---

U.S.     dollars
          in thousands (except share and per share data)

|                                                    |       | Year ended December 31,
|--------------------------------------------------- | ----- | -----------------------
|
|Revenues                                            | 12    | $        29,197        
|Cost of revenues                                    |       | 16,605                 
|                                                    |       |                        
|                                                    |       |                        
|Gross profit (loss)                                 |       | 12,592                 
|                                                    |       |                        
|                                                    |       |                        
|Operating expenses:                                
|Research and development                            |       | 9,904                  
|Less - grants and participations                    |       | 2,211                  
|                                                    |       |                        
|                                                    |       |                        
|Research and development, net                       |       | 7,693                  
|Selling and marketing, net                          | 13(a) | 8,790                  
|General and administrative                          |       | 1,926                  
|Amortization of deferred stock compensation (a)     |       | 9,529                  
|Non-recurring expenses, net                         | 11    | -                      
|                                                    |       |                        
|                                                    |       |                        
|Totaloperating expenses                             |       | 27,938                 
|                                                    |       |                        
|                                                    |       |                        
|Operating loss                                      |       | (15,346)               
|Financial income, net                               | 13(b) | 2,470                  
|                                                    |       |                        
|                                                    |       |                        
|Net loss                                            |       | $     (12,876)         
|                                                    |       |                        
|                                                    |       |                        
|Dividend related to Convertible Preferred shares    |       | (22,328)               
|                                                    |       |                        
|                                                    |       |                        
|Net loss attributable to Ordinary shareholders      |       | $     (35,204)         
|                                                    |       |                        
|                                                    |       |                        
|Basic and diluted net loss per share                |       | $         (3.06)       
|                                                    |       |                        
|                                                    |       |                        
|Weighted average number of shares used in computing
|basic and diluted net loss per share                |       | 11,501,722             
|                                                    |       |                        
|                                                    |       |                        
|(a) Amortization of deferred stock compensation     |      
|relates to the following:                          
|Cost of revenues                                    |       | $             603      
|Research and development costs, net                 |       | 3,408                  
|Selling and marketing expenses, net                 |       | 3,085                  
|General and administrative expenses                 |       | 2,433                  
|                                                    |       |                        
|                                                    |       |                        
|Total amortization of deferred stock compensation   |       | $          9,529       
|                                                    |       |                        

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

F-6

---

---

# CERAGON NETWORKS LTD.
AND ITS SUBSIDIARIES

# STATEMENTS OF CHANGES IN
SHAREHOLDERS EQUITY

---

# U.S. dollars in
thousands (except share data)

|                                                    | Preferred
shares | Ordinary

shares | Share

capital | Additional
paid-in
capital | Deferred stock

compensation | Accumulated
deficit | Total
shareholders'
equity | 
|--------------------------------------------------- | ---------------- | ---------------- | -------------- | -------------------------- | ---------------------------- | ------------------- | -------------------------- | 
|Balance as of January 1, 2000                       | 5,052,000        | 5,240,750        | $ 28           | $   25,471                 | $ (10,272)                   | $ (11,897)          | $     3,330                | 
|                                                    |                  |                  |                |                            |                              |                     |                            | 
|Issuance of Preferred shares, net                   | 4,440,500        | -                | 10             | 22,318                     | -                            | -                   | 22,328                    
|Issuance of Ordinary shares - initial public       
|Offering, net                                       | -                | 5,784,271        | 14             | 88,618                     | -                            | -                   | 88,632                    
|Conversion of Preferred shares                      | (9,492,500)      | 9,492,500        | -              | -                          | -                            | -                   | -                         
|Compensation related to warrants to bank            | -                | -                | -              | 125                        | -                            | -                   | 125                       
|Dividend related to convertible preferred    shares | -                | -                | -              | 22,328                     | -                            | (22,328)            | -                         
|Deferred stock compensation                         | -                | -                | -              | 11,488                     | (11,488)                     | -                   | -                         
|Amortization of deferred stock compensation         | -                | -                | -              | -                          | 9,529                        | -                   | 9,529                     
|Net loss                                            | -                | -                | -              | -                          | -                            | (12,876)            | (12,876)                  
|                                                    |                  |                  |                |                            |                              |                     |                           
|                                                    |                  |                  |                |                            |                              |                     |                            | 
|Balance as of December 31, 2000                     | -                | 20,517,521       | 52             | 170,348                    | (12,231)                     | (47,101)            | 111,068                   
|                                                    |                  |                  |                |                            |                              |                     |                            | 
|Exercise of stock options                           | -                | 1,647,675        | 4              | -                          | -                            | -                   | 4                         
|Deferred stock compensation related to             
|forfeited options                                   | -                | -                | -              | (952)                      | 952                          | -                   | -                         
|Additional IPO expenses                             | -                | -                | -              | (41)                       | -                            | -                   | (41)                      
|Amortization of deferred stock compensation         | -                | -                | -              | -                          | 6,431                        | -                   | 6,431                     
|Net loss                                            | -                | -                | -              | -                          | -                            | (56,843)            | (56,843)                  
|                                                    |                  |                  |                |                            |                              |                     |                           
|                                                    |                  |                  |                |                            |                              |                     |                            | 
|Balance as of December 31, 2001                     | -                | 22,165,196       | 56             | 169,355                    | (4,848)                      | (103,944)           | 60,619                    
|                                                    |                  |                  |                |                            |                              |                     |                            | 
|Exercise of stock options                           | -                | 413,150          | *) -           | 33                         | -                            | -                   | 33                        
|Reversal of stock compensation related to          
|forfeited options                                   | -                | -                | -              | (102)                      | 102                          | -                   | -                         
|Amortization of deferred stock compensation         | -                | -                | -              | -                          | 2,974                        | -                   | 2,974                     
|Net loss                                            | -                | -                | -              | -                          | -                            | (14,360)            | (14,360)                  
|                                                    |                  |                  |                |                            |                              |                     |                           
|                                                    |                  |                  |                |                            |                              |                     |                            | 
|Balance as of December 31, 2002                     | -                | 22,578,346       | $ 56           | $ 169,286                  | $ (1,772)                    | $ (118,304)         | $   49,266                
|                                                    |                  |                  |                |                            |                              |                     |                           

*)    
          Represents an amount lower than $ 1.

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

F-7

---

---

# 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 loss                                                                | $ (12,876)             
|Adjustments required to reconcile net loss to net cash used in         
|operating activities:                                                  
|Depreciation                                                            | 854                    
|Amortization of deferred stock compensation                             | 9,529                  
|Loss from disposal and impairment of property and equipment             | -                      
|Accrued severance pay, net                                              | 352                    
|Accrued interest on short-term bank deposits                            | (256)                  
|Accrued interest on long-term bank deposits                             | -                      
|Interest accrued and amortization of premium on held to maturity       
|marketable securities                                                   | -                      
|Decrease (increase) in trade receivables                                | (10,854)               
|Decrease (increase) in other accounts receivable and prepaid expenses   | (4,487)                
|Decrease (increase) in inventories                                      | (20,158)               
|Increase (decrease) in trade payables                                   | 9,771                  
|Increase (decrease) in other accounts payables and accrued expenses     | 2,298                  
|Other                                                                   | 4                      
|                                                                        |                        
|Net cash used in operating activities                                   | (25,823)               
|                                                                        |                        
|                                                                        |                        
|Cash flows from investing activities:                                  
|Purchase of property and equipment                                      | (5,121)                
|Proceeds from sales of property and equipment                           | 72                     
|Short-term bank deposits, net                                           | (10,000)               
|Investment in long-term bank deposits                                   | -                      
|Investment in held to maturity marketable securities                    | -                      
|Proceeds from sale and maturities of held to maturity marketable       
|securities                                                              | -                      
|                                                                        |                        
|Net cash provided by (used in) investing activities                     | (15,049)               
|                                                                        |                        
|                                                                        |                        
|Cash flows from financing activities:                                  
|Repayment of loan received from related party                           | (1,173)                
|Proceeds from issuance of Preferred shares, net                         | 22,328                 
|Proceeds from issuance of Ordinary shares, net                          | 88,632                 
|Payment of additional IPO expenses                                      | -                      
|                                                                        |                        
|                                                                        |                        
|Net cash provided by (used in) financing activities                     | 109,787                
|                                                                        |                        
|                                                                        |                        
|Increase (decrease) in cash and cash equivalents                        | 68,915                 
|Cash and cash equivalents at the beginning of the year                  | 1,149                  
|                                                                        |                        
|                                                                        |                        
|Cash and cash equivalents at the end of the year                        | $   70,064             
|                                                                        |                        
|                                                                        |                        
|Supplemental disclosure of cash flows activities:                      
|Cash paid during the year for interest                                  | $          66          
|                                                                        |                        
|                                                                        |                        
|Supplemental disclosure of non-cash investing and financing activities:
|Compensation related to warrants issued to bank                         | $        125           
|                                                                        |                        
|                                                                        |                        
|Dividend related to convertible preferred shares                        | $   22,328             
|                                                                        |                        
|                                                                        |                        
|Transfer of inventory to property and equipment                         | $        691           
|                                                                        |                        
|                                                                        |                        
|Purchase of property and equipment in payables                          | $        842           
|                                                                        |                        

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

F-8

---

---

# CERAGON NETWORKS LTD.
AND ITS SUBSIDIARIES

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS

---

# U.S. dollars in thousands

# NOTE 1:- GENERAL

| | Ceragon
Networks Ltd. (the Company) is an Israeli corporation that is engaged in one
business segment  developing, manufacturing and marketing high capacity broadband
wireless network equipment. In August 2000, the Company completed an initial public
offering of its Ordinary shares.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company has eight wholly-owned subsidiaries, Ceragon Networks, Inc. and Ceragon Networks
Latin America, Inc. in the U.S., Ceragon Networks (UK) Limited in the United Kingdom,
Ceragon Networks SARL in France, Ceragon Networks Gmbh in Germany, Ceragon Networks (HK)
Limited in Hong Kong, Ceragon Networks, S.A. de C.V. in Mexico and Ceragon Networks do
Brasil Limitada in Brazil. The subsidiaries provide marketing, distribution, sales and
technical support to the Companys customers in Europe, Middle East, Africa, South
America, Asia and the U.S.. (Also see Note 15).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
to principal markets and major customers, see Note 12.
| | ---------------------------------------------------------

# NOTE 2:- SIGNIFICANT
ACCOUNTING POLICIES

| | The
 consolidated  financial  statements  have been prepared in accordance  with  generally
 accepted               accounting principles in the United States ("U.S. GAAP").
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Financial
statements in U.S. dollars:
| | -------------------------------------

| | A
majority of the revenues of the Company and its subsidiaries is generated in U.S. dollars
(dollars). In addition, a substantial portion of the Company and its
subsidiaries costs is incurred in dollars. Since the Companys management
believes that the dollar is the primary currency in the economic environment in which the
Company and its subsidiaries operate, the dollar is their functional and reporting
currency. Accordingly, monetary accounts maintained in currencies other than the dollar
are remeasured into U.S. dollars in accordance with Statement of the Financial Accounting
Standard No. 52 Foreign Currency Translation (SFAS No. 52). All
transaction gains and losses from the remeasurement of monetary balance sheet items are
reflected in the statements of operations as financial income or expense, as appropriate.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Principles
of consolidation:
| | ----------------------------

| | The
consolidated financial statements include the accounts of the Company and its wholly
owned subsidiaries. Intercompany balances and transactions, have been eliminated in
consolidation.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-9

---

---

# CERAGON NETWORKS LTD.
AND ITS SUBSIDIARIES

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS

---

# U.S. dollars in thousands

# NOTE 2:- SIGNIFICANT
ACCOUNTING POLICIES (Cont.)

| | Cash
equivalents:
| | -----------------

| | Cash
equivalents include short-term, highly liquid investments that are readily convertible to
cash with maturities of three months or less at the date acquired.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Short-term
and long-term bank deposits:
| | ---------------------------------------

| | Short-term
bank deposits are deposits with maturities of more than three months, but less than one
year. The short-term deposits are in U.S. dollars and bear interest at an average rate of
3.06%. The short-term bank deposits are presented at their cost, including accrued
interest.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Long-term
bank deposits are deposits with maturities of more than one year. The long-term deposits
are in U.S. dollars and bear interest at an average rate of 3.65%. The long-term bank
deposits are presented at their cost, including accrued interest.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Marketable
securities:
| | ----------------------

| | The
Company  accounts for  investments  in  marketable  securities in  accordance  with
 Statement of               Financial  Accounting  Standard  No.  115,  "Accounting  for
Certain  Investments  in Debt and Equity               Securities" ("SFAS No. 115").
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Management
determines the appropriate classification of its investments in marketable debt
securities and commercial papers at the time of purchase and reevaluates such
determinations at each balance sheet date. Debt securities are classified as
held-to-maturity when the Company has the positive intent and ability to hold the
securities to maturity and are stated at amortized cost.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
amortized cost of held-to-maturity securities is adjusted for amortization of premiums
and accretion of discounts to maturity. Such amortization, decline in value judged to be
other than temporary and interest are included in financial income, net. Realized gains
and losses on sale of investments, as determined on a specific identification basis are
included in the financial income net, as well.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2001 and 2002, the Company classified all its marketable securities as
held to maturity.
| | -----------------------------------------------------------------------------------------------------------

| | Allowance
For Doubtful Accounts
| | -------------------------------

| | The
allowance is determined based upon managements evaluation of specific and general
receivables that are doubtful of collection. The allowance for doubtful accounts was $ 450
and $ 500 as of December 31, 2001 and 2002, respectively. For the years ended
December 31, 2000, 2001 and 2002, the Company recorded provision for doubtful accounts
and bad debts expense of $ 150, $ 2,800, and $ 50, respectively, included
in general and administrative expenses.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-10

---

---

# CERAGON NETWORKS LTD.
AND ITS SUBSIDIARIES

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS

---

# U.S. dollars in thousands

# NOTE 2:- SIGNIFICANT
ACCOUNTING POLICIES (Cont.)

| | Inventories:
| | ------------

| | Inventories
are stated at the lower of cost or market value. Inventory write-offs are provided to
cover risks arising from slow-moving items, technological obsolescence, excess
inventories and for market prices lower than cost.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2001, the Company wrote-off approximately $ 26,900 of excess inventory, which has
been included in cost of revenues.
| | -----------------------------------------------------------------------------------------------------------------------

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

| | Raw
materials, parts and supplies  using the moving average cost method with the
addition of allocable indirect manufacturing costs.
| | -------------------------------------------------------------------------------------------------------------------------------------

| | Work-in-progress
 represents the cost of manufacturing with the addition of allocable indirect
manufacturing costs.
| | --------------------------------------------------------------------------------------------------------------------

| | Finished
products  recorded on the basis of direct manufacturing costs with the addition of
allocable indirect manufacturing costs.
| | ------------------------------------------------------------------------------------------------------------------------------------

| | Property
and equipment:
| | -----------------------

| | Property
and equipment are stated at cost, net of accumulated depreciation. Depreciation is
calculated by the straight-line method over the estimated useful lives of the assets, at
the following annual rates:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                  | %                         
|------------------------------------------------- | --------------------------
|Computers, manufacturing and peripheral equipment | 15 - 33                   
|Office furniture and equipment                    | 7                         
|Leasehold improvements                            | Over the term of the lease

| | The
Company 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 No. 144) and in
accordance with Statement of Financial Accounting Standard No. 121 Accounting for
the Impairment of Long-Lived Assets and For the Long-Lived Assets to be Disposed Of(SFAS
No. 121). SFAS No. 121 relates only to the years 2000 and 2001. 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 assets. If such assets are considered to be impaired, the impairment to
be recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are reported at the lower
of the carrying amount or fair value less costs to sell. During 2002, no impairment was
recorded.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-11

---

---

# CERAGON NETWORKS LTD.
AND ITS SUBSIDIARIES

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS

---

# U.S. dollars in thousands

# NOTE 2:- SIGNIFICANT
ACCOUNTING POLICIES (Cont.)

| | 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 financial reporting and tax bases of assets and liabilities and 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.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Revenue
recognition:
| | --------------------

| | The
Company and its subsidiaries generate most of their revenues from selling their products
to end customers system integrators, distributors, resellers and to Original Equipment
Manufacturers (OEM) all of whom are considered end users.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Revenues
from product sales are recognized in accordance with Staff Accounting Bulletin No. 101
Revenue Recognition in Financial Statements (SAB No. 101), 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
reasonably assured. When a right of return exists, the Company defers revenues until the
right of return expires.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
contracts for which acceptance is required by the customer, the Company defers revenues
until receiving the acceptance confirmation.
| | ---------------------------------------------------------------------------------------------------------------------------------------

| | The
Company considers all arrangements with payment terms extending beyond its policy for
ordinary course of credit, not to be fixed or determinable. If the fee is not fixed or
determinable, revenues is recognized as payments become due from the customer provided
that all other revenue recognition criteria have been met.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Deferred
revenues include amounts received from customers but not recognized as revenues.
| | -----------------------------------------------------------------------------------------

| | Research
and development costs:
| | -------------------------------

| | Research
and development costs, net of grants received, are charged to the statements of
operations as incurred.
| | ----------------------------------------------------------------------------------------------------------------

| | 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 deduction from research and development costs.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Royalty-bearing
grants from the Fund for the Encouragement of Marketing Activities of the Government of
Israel are recognized at the time the Company is entitled to such grants, on the basis of
the costs incurred and included as a deduction from selling and marketing expenses.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-12

---

---

# CERAGON NETWORKS LTD.
AND ITS SUBSIDIARIES

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS

---

# U.S. dollars in thousands

# NOTE 2:- SIGNIFICANT
ACCOUNTING POLICIES (Cont.)

| | Advertising
expenses:
| | ---------------------

| | Advertising
expenses are charged to the statements of operations as incurred. Advertising expenses
for the years ended December 31, 2000, 2001 and 2002 were $ 569, $ 552 and $ 163,
respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Concentrations
of credit risk:
| | ------------------------------

| | Financial
instruments that potentially subject the Company and its subsidiaries to concentrations
of credit risk consist principally of cash and cash equivalents, short-term and long-term
bank deposits, marketable securities and trade receivables.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
majority of the Companys cash and cash equivalents and short-term and long-term
bank deposits are invested in U.S dollars instruments with major banks worldwide (mainly
in the United States). Such cash and cash equivalents 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 large and solid organizations
located mainly in the United States, South America and Europe. The Company performs
ongoing credit evaluations of its customers. An allowance for doubtful accounts is
determined with respect to those amounts that the Company has determined to be doubtful
of collection and by a specific and general reserve. In certain circumstances, the
Company may require letters of credit, other collateral or additional guarantees. The
Company insures certain customers through the Israel Foreign Trade Insurance Company.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys marketable securities include investments in U.S government securities and
debentures of corporations and commercial papers. Management believes that those
corporations are financially sound, the portfolio is well diversified, and accordingly,
minimal credit risk exists with respect to these marketable securities.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company and its subsidiaries have no significant off-balance-sheet concentration of
credit risk such as foreign exchange contracts, option contracts or other foreign hedging
arrangements.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Accounting
for stock-based compensation:
| | ----------------------------------------

| | The
Company has elected to follow Accounting Principles Board Opinion No. 25 Accounting
for Stock Issued to Employees (APB No. 25) and FASB Interpretation No.
44 Accounting for Certain Transactions Involving Stock Compensation (FIN
No. 44) in accounting for its employee stock option plans. Under APB No. 25, when
the exercise price of the Companys share options is less than the market price of
the underlying shares on the date of grant, compensation expense is recognized.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-13

---

---

# CERAGON NETWORKS LTD.
AND ITS SUBSIDIARIES

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS

---

# U.S. dollars in thousands

# NOTE 2:- SIGNIFICANT
ACCOUNTING POLICIES (Cont.)

| | Under
SFAS No.123, Accounting for Stock-Based Compensation (SFAS No.123),
pro forma information regarding net loss and net loss per share is required for grants
issued after December 1994, that has been determined as if the Company had accounted for
its employee share options under the fair value method of SFAS No.123. The fair value for
these options were estimated at the grant date using a Black-Scholes option pricing model
with the following weighted-average assumptions for 2000, 2001 and 2002: risk-free
interest rates of 5%, 1.75% and 1.88% respectively, dividend yields of 0% for each year,
volatility factors of the expected market price of the Companys Ordinary shares of
110% for 2000 and 2001 and 68% for 2002, and expected life of the options of 1.5  5
years, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
purposes of pro-forma disclosure, the estimated fair value of the options is amortized to
expense over the options vesting period.
| | ---------------------------------------------------------------------------------------------------------------------------------------

| | Pro
forma information under SFAS No. 123:
| | -----------------------------------------

|                                                  | Year ended December 31,
|------------------------------------------------- | -----------------------
|
|Net loss as reported                              | $   (12,876)           
|                                                  |                        
|                                                  |                        
|Add: stock based compensation expense            
|determined under APB 25                           | $       9,529          
|                                                  |                        
|                                                  |                        
|Deduct: stock-based compensation expense          |                        
|determined under fair value method for all awards | $   (11,780)           
|                                                  |                        
|Pro forma net loss                                | $   (15,127)           
|                                                  |                        
|                                                  |                        
|Basic and diluted loss per share, as reported     | $     (3.06)           
|                                                  |                        
|                                                  |                        
|Pro forma basic and diluted net loss per share    | $     (1.32)           
|                                                  |                        

| | The
Company applies SFAS No. 123 and EITF 96-18 Accounting for Equity Instruments that
are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods
or Services with respect to options issued to non-employees. SFAS No.123 requires
use of an option valuation model to measure the fair value of these options at the grant
date.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Severance
pay:
| | --------------

| | The
Companys liability for severance pay is calculated pursuant to Israeli severance
pay laws 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 provided by monthly deposits with insurance
policies and by an accrual. The value of those policies is recorded as an asset in the
Companys balance sheet.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-14

---

---

# CERAGON NETWORKS LTD.
AND ITS SUBSIDIARIES

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS

---

# U.S. dollars in thousands

# NOTE 2:- SIGNIFICANT
ACCOUNTING POLICIES (Cont.)

| | The
deposited funds include profits accumulated up to the balance sheet date. The deposited
funds may be withdrawn only upon the fulfillment of the obligation pursuant to Israeli
severance pay law or labor agreements. The value of the deposited funds are based on the
cash surrendered value of these policies, and includes immaterial profits.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Severance
expenses for the years ended December 31, 2000, 2001 and 2002, amounted to approximately $ 636,
$ 654 and $ 484, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------

| | 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 and trade payables approximate their fair values due to the short-term
maturities of such instruments.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Fair value for marketable securities are based on quoted market prices and do not differ
significantly from the carrying amount. (See Also Note 3).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------

| | Basic
and diluted net loss per share:
| | -------------------------------------

| | Basic
net loss per share is computed based on the weighted average number of Ordinary shares
outstanding during each year. Diluted net 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
No. 128).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | All
outstanding stock options and warrants have been excluded from the calculation of the
diluted net loss per share because all such securities are anti-dilutive for all periods
presented. The total weighted average number of shares related to the outstanding options
and warrants excluded from the calculations of diluted net loss per share were 5,600,500,
5,728,854 and 5,923,106 for the years ended December 31, 2000, 2001 and 2002,
respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Impact
of recently issued accounting standard:
| | ----------------------------------------------

| | In
June 2002, the FASB issued SFAS No.146, Accounting for Costs Associated with Exit
or Disposal Activities, which addresses significant issue regarding the
recognition, measurement, and reporting of costs associated with exit and disposal
activities, including restructuring activities. SFAS No.146 requires that costs
associated with exit or disposal activities be recognized when they are incurred rather
than at the date of a commitment to an exit or disposal plan. SFAS No.146 is effective
for all exit or disposal activities initiated after December 31, 2002. The Company does
not expect the adoption of SFAS No.146 to have a material impact on our results of
operations or financial position.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-15

---

---

# CERAGON NETWORKS LTD.
AND ITS SUBSIDIARIES

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS

---

# U.S. dollars in thousands

# NOTE 3:- MARKETABLE
SECURITIES

| | The
following is a summary of held-to-maturity securities:
| | ----------------------------------------------------------

|                  | December 31,
|----------------- | ------------
|
|
|Held-to-maturity: |             
|U.S. government  
|and agencies     
|debts             | $     502   
|Corporate        
|debentures        | 9,800       
|Commercial       
|papers            | 10,257      
|                  |             
|                  |             
|                  |             
|                  | $20,559     
|                  |             
|                  |             

| | Aggregate
maturities of held-to-maturity securities for years subsequent to December 31, 2002 are:
| | --------------------------------------------------------------------------------------------------

|                  | December 31, 2002
|----------------- | -----------------
|
|held-to-maturity: |                  
|                  |                  
|2003              | $ 11,743         
|2004              | 6,418            
|2005              | 5,257            
|                  |                  
|                  | $ 23,418         
|                  |                  

| | During
2002, the Company sold five marketable securities in consideration of $ 3,854. The
marketable securities were sold before their maturity, due to the deterioration of their
credit rating, as defined in the Companys investment policy. In accordance with the
Companys policy, the remaining marketable securities continued to be classified as
held to maturity.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys investments in debt and equity securities are diversified among
high-credit quality securities, in accordance with the Companys investment policy.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

F-16

---

---

# CERAGON NETWORKS LTD.
AND ITS SUBSIDIARIES

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS

---

# U.S. dollars in thousands

# NOTE 4:- OTHER ACCOUNTS
RECEIVABLE AND PREPAID EXPENSES

|                       | December 31,
|---------------------- | ------------
|
|Government authorities | $    613    
|Prepaid expenses       | 1,029       
|Other                  | 501         
|                       |             
|                       |             
|                       | $ 2,143     
|                       |             

# NOTE 5:- INVENTORIES

|Raw material, parts and supplies | $ 2,354 | $ 1,530
|-------------------------------- | ------- | -------
|Work in progress                 | 3,913   | 3,655  
|Finished products                | 1,110   | 2,869  
|                                 |         |        
|                                 |         |        
|                                 | $ 7,377 | $ 8,054
|                                 |         |        

| | In
2001, the Company recorded an expense of $ 26,900 for inventory write-offs, which is
included in cost of revenues.
| | ---------------------------------------------------------------------------------------------------------------------

# NOTE 6:- PROPERTY AND
EQUIPMENT

| | a. | Composition
of assets grouped by major classifications are as follows:
| | -- | ----------------------------------------------------------------------

|                                                  | December 31,
|------------------------------------------------- | ------------
|
|Cost:                                             |             
|Computers, manufacturing and peripheral equipment | $ 5,808     
|Office furniture and equipment                    | 1,827       
|Leasehold improvements                            | 516         
|                                                  |             
|                                                  | 8,151       
|                                                  |             
|Accumulated depreciation:                        
|Computers, manufacturing and peripheral equipment | 2,380       
|Office furniture and equipment                    | 598         
|Leasehold improvements                            | 80          
|                                                  |             
|                                                  | 3,058       
|                                                  |             
|Depreciated cost                                  | $ 5,093     
|                                                  |             

F-17

---

---

# CERAGON NETWORKS LTD.
AND ITS SUBSIDIARIES

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS

---

# U.S. dollars in thousands

# NOTE 6:- PROPERTY AND
EQUIPMENT (Cont.)

| | Depreciation
expense for the years ended December 31, 2000, 2001 and 2002 is $ 854, $ 2,015
and $1,737, respectively.
| | ---------------------------------------------------------------------------------------------------------------------

| | b. | In
2001, the Company recorded a property and equipment impairment charge in the
               amount of approximately $ 2,018, which is presented in cost of
revenues.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | As
for pledges on assets, see Note 8d.
| | -- | --------------------------------------

# NOTE 7:- OTHER ACCOUNTS
PAYABLE AND ACCRUED EXPENSES

|                               | December 31,
|------------------------------ | ------------
|
|Employees and payroll accruals | $   765     
|Accrued non-recurring expenses | 1,988       
|Accrued expenses               | 1,317       
|Deferred revenues              | -           
|Provision for warranty costs   | 530         
|Other                          | 316         
|                               |             
|                               |             
|                               | $ 4,916     
|                               |             

# NOTE 8:- COMMITMENTS AND
CONTINGENT LIABILITIES

| | a. | Royalties
| | -- | ---------

| | 1. | The
Company participated in programs sponsored by the Israeli Government for           the
support of research and development activities. Through December 31, 2002,           the
Company had obtained grants from the Office of the Chief Scientist of the
          Israeli Ministry of Industry and Trade (the OCS) aggregating to
          $ 10,347 for certain of the Companys research and development
          projects. The Company is 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. dollars
          and for grants received after January 1, 1999 also bearing interest at the rate
          of LIBOR. The obligation to pay these royalties is contingent on actual sales
of           the products and in the absence of such sales no payment is required.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Through
December 31, 2002, the Company has paid or accrued royalties to the OCS in the amount of $ 2,417.
As of December 31, 2002, the aggregate contingent liability to the OCS amounted to $ 7,128.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-18

---

---

# CERAGON NETWORKS LTD.
AND ITS SUBSIDIARIES

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS

---

# U.S. dollars in thousands

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

| | 2. | According
to the Marketing plan, which was approved in May 2000, the Company is           committed
to pay royalties to the Fund for the Encouragement of Marketing           activities of
the Government of Israel at a rate of 4% of the increase in export           sales up to
the total dollar-linked amount of the grants received, plus           interest. The
royalties are payable commencing from the end of the second year           of
implementation of the plan which is January 1, 2003. The Companys total
          obligation for royalties in respect of government participation received or
          accrued, net of royalties paid or accrued, amounted to $ 180 as of
December           31, 2002.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | The
Company is committed to pay royalties to a subcontractor for a           components
development and its integration into certain of the           Companys products.
Royalties will be paid at the rates of 4%, 3%, 2% and           1% for the first, second,
third and fourth years of revenues, respectively, and           1% for the fifth to
seventh year of revenues. The first year of revenues is           1998. As of December
31, 2002, the Company is in its fifth year of revenues           under the abovementioned
plan. The royalties are calculated as a rate of sales           collection.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Royalties
to the subcontractor amounted to $ 475, $ 556 and $ 92 in 2000, 2001 and
2002, respectively.
| | ------------------------------------------------------------------------------------------------------

| | b. | Lease
commitments:
| | -- | ------------------

| | The
Company and its subsidiaries lease their offices and vehicles under various lease
agreements that expire on various dates. Aggregate minimum rental commitments under
non-cancelable leases at the December 31, 2002, are as follows:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|     | Year ended December 31,
|---- | -----------------------
|
|2003 | $    927               
|2004 | 762                    
|2005 | 291                    
|     |                        
|     |                        
|     | $ 1,980                
|     |                        

| | Facilities
lease expenses for the years ended December 31, 2000, 2001 and 2002 were approximately $ 902,
$ 1,433 and $ 1,323, respectively
| | ------------------------------------------------------------------------------------------------------------------------------------------

| | Vehicles
lease expenses for the years ended December 31, 2000, 2001 and 2002 were approximately $ 310,
$ 560 and $ 610, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------

F-19

---

---

# CERAGON NETWORKS LTD.
AND ITS SUBSIDIARIES

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS

---

# U.S. dollars in thousands

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

| | c. | In
2001, the Company entered into agreements with two suppliers pursuant to
               which the Company was initially committed to purchase certain products
from                these suppliers. The initial minimum purchase commitments under these
agreements                were approximately $ 27,000.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2002, the Company entered into a supplementary arrangement with one of these suppliers in
which all minimum purchase commitments of the prior agreement were mutually rescinded
(see also Note 11a).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | With
regard to the other supplier, in 2003, the Company entered into a supplementary
arrangement whereby all prior minimum purchase commitments were mutually rescinded. The
Company has further agreed to purchase a minimum of approximately $3 million of products
in 2003, together with certain raw materials and work in process. There are no further
minimum purchase commitments with either of these suppliers.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | Charges
and guarantees
| | -- | ----------------------

| | In
February 2000, the Company received a line of credit from a bank in the amount of $ 6,000
for a period of 36 months. As of December 31, 2002, the line of credit has not been
utilized. In consideration for the line of credit, the Company registered a floating
charge on all its assets in favor of the bank. (see also Note 9a).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2002, the Company provided bank guarantees for an aggregate amount of $ 2,400
with respect to rent and commitments to its customers.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------

# NOTE 9:-
SHAREHOLDERS EQUITY

| | The
Ordinary shares of the Company are traded on NASDAQ National Market.
| | ------------------------------------------------------------------------

| | a. | General:
| | -- | --------

| | The
Ordinary shares entitle their holders the rights to receive notice to participate and
vote in general meetings of the Company, the right to share in excess upon liquidation of
the Company, and to receive dividends, if declared.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company recorded a Preferred share dividend of $ 22,328 representing the value of
the beneficial conversion feature upon the issuance of preferred shares in February 2000
and of Series B Preferred shares in March 2000. The beneficial conversion feature was
calculated based on the difference between the conversion price of $ 2.45 and $ 5.11
per share, respectively, and the estimated fair value of the Ordinary shares at the dates
of issuances, but limited to the amount of the proceeds from the issuances of the
Preferred shares.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
August 2000, the Company closed its initial public offering of its Ordinary shares on the
NASDAQ National Market. The Company issued 5,784,271 Ordinary shares (which includes
34,271 Ordinary shares issued to the Bank  see Also paragraph c) in consideration
for approximately $ 88,600, net of issuance expenses. In addition, all Preferred
shares were converted to an equal number of ordinary shares.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-20

---

---

# CERAGON NETWORKS LTD.
AND ITS SUBSIDIARIES

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS

---

# U.S. dollars in thousands

# NOTE 9:-
SHAREHOLDERS EQUITY

| | Prior
to the consummation of the initial public offering of its Ordinary shares, the Company
effected a 100-to-1 stock split with respect to its Ordinary shares and issue 1.50 shares
for each outstanding Ordinary share as a share dividend. All references to per share
amounts and the number of shares in these financial statements have been restated to
reflect the stock split and the share dividend.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Stock
options plans:
| | -- | --------------------

| | 1. | Under
the Companys 1996 Stock Options Plan and the 1997 affiliate           employees
Stock Option Plan (the Plans), options may be granted to           officers,
directors, employees and consultants of the Company or its           subsidiaries.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Pursuant
to the Plans, the Company reserved for issuance 9,464,000 Ordinary           shares. As
of December 31, 2002, 1,097,642 Ordinary shares of the Company are           still
available for future grant under the plans. Any options, which are           canceled or
forfeited before expiration, become available for future grants.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | The
options vest primarily over three to five years. The options granted           generally
expire no later than ten years from the date of grant.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------

| | A
summary of the Companys stock option activity, and related information for the year
ended December 31, is as follows:
| | ------------------------------------------------------------------------------------------------------------------------

|                          | Year ended December 31,
|------------------------- | -----------------------
|
|
|
|Outstanding at the       
|beginning of the year     | 3,614,250              
|Granted                   | 1,986,250              
|Exercised                 | -                      
|Forfeited                 | -                      
|                          |                        
|                          |                        
|Outstanding at the end   
|of the year               | 5,600,500              
|                          |                        
|                          |                        
|Options exercisable at   
|the end of the year       | 1,718,000              
|                          |                        
|                          |                        
|Weighted average fair    
|value of options granted 
|during the year, at their
|grant date                | 1,986,250              
|                          |                        
|                          |                        

| | *)
      Lower than $ 0.01
| | --------------------------

| | Since
the Initial Public Offering in August 2000, the exercise price of the options are equal
to the market value of the Ordinary shares on the date the option is granted, for all
grants.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-21

---

---

# CERAGON NETWORKS LTD.
AND ITS SUBSIDIARIES

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS

---

# U.S. dollars in thousands

# NOTE 9:-
SHAREHOLDERS EQUITY (Cont.)

| | The
options outstanding as of December 31, 2002, have been separated into ranges of exercise
price, as follows:
| | ---------------------------------------------------------------------------------------------------------------

|Ranges of
exercise prices | Options
outstanding
as of
December 31,
2002 | Weighted
average
remaining
contractual
life | Weighted
average
exercise price | Options
exercisable at
December 31,
2002 | Weighted
average
exercise
price of
exercisable
options | 
|------------------------- | ------------------------------------------- | ------------------------------------------- | ------------------------------- | ---------------------------------------- | ------------------------------------------------------ | 
|
|*)                        | 1,809,700                                   | 6.35                                        | *)                              | 1,128,150                                | *)                                                     | 
|1.15 - 1.50               | 1,201,450                                   | 9.66                                        | 1.34                            | -                                        | -                                                     
|1.80 - 2.61               | 1,962,733                                   | 8.66                                        | 2.07                            | 572,083                                  | 2.09                                                  
|2.80 - 4.09               | 539,150                                     | 7.62                                        | 3.71                            | 220,941                                  | 3.82                                                  
|8.18 - 11.75              | 675,750                                     | 7.77                                        | 10.37                           | 369,808                                  | 10.21                                                 
|12.94 - 17.00             | 116,750                                     | 7.64                                        | 14.17                           | 69,898                                   | 13.77                                                 
|                          |                                             |                                             |                                 |                                          |                                                       
|                          |                                             |                                             |                                 |                                          |                                                        | 
|                          | 6,305,533                                   | 7.98                                        | 2.59                            | 2,360,880                                | 2.87                                                  
|                          |                                             |                                             |                                 |                                          |                                                       

| | *)         Lower
than $ 0.01.
| | -----------------------------

| | Where
the Company has recorded deferred stock compensation for options, which were granted
before the Initial Public Offering in August 2000, with an exercise price below the fair
market value of the Ordinary shares, the deferred stock compensation has been amortized
and recorded as compensation expense ratably over the vesting period of the options.
Compensation expense of approximately $ 9,529, $ 6,431 and $ 2,974 were
recognized during the years ended December 31, 2000, 2001 and 2002, respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Warrant
to a supplier:
| | ----------------------

| | In
October 31, 2002, the Company entered into a supplementary arrangement with one of the
Companys suppliers, according to which, the Company issued a warrant to a supplier
to purchase an aggregate of 700,000 Ordinary shares of the Company with an exercise price
per Ordinary share of $ 0.003, with a cash settlement alternative (instead of the
exercise for shares) for $ 875. Commencing April 30, 2003 and expiring on October
31, 2003, the warrant may be exercised for cash (in whole but not in part) payable in 6
equal monthly payments. Commencing September 30, 2003, the warrant may be exercised (in
whole but not in part) together with a cash payment of $ 0.003 per share, or by a
net exercise purchase, for 700,000 Ordinary shares.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Since
the supplier has the option to receive cash, the liability, in the amount of $ 875, was
recorded (see also Note 11a).
| | ---------------------------------------------------------------------------------------------------------------------------

| | Options
issued to consultants:
| | ------------------------------

| | During
2002, the Company granted 64,500 options to consultants, which vest over 0.5 to 4 years
and expire no later than 10 years from the date of grant.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------

F-22

---

---

# CERAGON NETWORKS LTD.
AND ITS SUBSIDIARIES

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS

---

# U.S. dollars in thousands

# NOTE 9:-
SHAREHOLDERS EQUITY (Cont.)

| | The
Company had accounted for its options to consultants under the fair value method of SFAS
No.123 and EITF 96-18. These options vest primarily over 4 years. The fair value for
these options was estimated using a Black-Scholes Option-Pricing Model with the following
weighted-average assumptions for 2000, 2001 and 2002: risk-free interest rates of 5%,
1.75% and 1.88% respectively, dividend yields of 0% for each year, volatility factors of
the expected market price of the Companys Ordinary shares of 110%, 110% and 68% for
2000, 2001 and 2002, respectively, and a weighted-average contractual life of the options
of 4 years, respectively. Compensation expenses have not been recorded in the
consolidated financial statements due to the insignificant amount of total compensation.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | In
1998, 122,500 warrants were granted to a subcontractor for certain research
               and development services rendered. The warrants have an exercise price of
less                than $0.01 per share and expire in 2011. The fair value of the
warrants at the                date of grant was $227 and was charged to research and
development expense.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
February 2000, the Company received a line of credit from a bank in the amount of $ 6,000
for a period of 36 months. The Company also issued to the bank a warrant to purchase
ordinary shares of the Company for an aggregate exercise price of up to $ 900. Based
on a private placement in March 2000 the bank became entitled to purchase 34,271 Ordinary
shares, at an exercise price of $ 5.11 per share. The fair value of the warrant at
the date of grant was $ 125 and the Company recorded financing expense in the amount
of $ 125, which are amortized over a period of three years. The warrant was
exercised upon the Companys IPO in August 2000.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | 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. The Company has decided not to
declare dividends out of tax-exempt earnings.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# NOTE 10:- TAXES ON INCOME

| | Tax
benefits under the Law for the Encouragement of Capital Investments, 1959:
| | ------------------------------------------------------------------------------

| | The
Investment Center has granted the status of an Approved Enterprise under
Israeli law to two investment programs at the Companys manufacturing facility in
Tel-Aviv. Additionally, the Company has submitted a third program for the expansion of
the same manufacturing facility. The main benefit arising from such status is the
reduction in tax rates on income derived from Approved Enterprises.
Consequently, the Company is entitled to two years of tax exempt and five years of
reduced tax rate (25%). Additionally, the Company is a foreign investors company,
as defined by that law and as such, is entitled to additional reduction of tax to 10%-25%
(based on the percentage of foreign ownership in each taxable year) and extension of
three years of the benefit period. Since the Company has had no taxable income since
inception, the benefits have not yet commenced for all programs.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-23

---

---

# CERAGON NETWORKS LTD.
AND ITS SUBSIDIARIES

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS

---

# U.S. dollars in thousands

# NOTE 10:- TAXES ON
INCOME (Cont.)

| | The
Company has completed implementation of its two investment programs for its Tel-Aviv
facility.
| | --------------------------------------------------------------------------------------------------

| | The
period of tax benefits, detailed above, is subject to limit of 12 years from the
commencement of production, or 14 years from the approval date, whichever is earlier.
Given the aforementioned conditions, under the first investment program, the period of
benefits for the production facilities, which has not yet commenced, will terminate in
the year 2011, and under the second investment program the period of benefits for the
production facilities, which has not yet commenced, will terminate in the year 2013.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
entitlement to the above benefits is conditional upon the Companys fulfilling the
conditions stipulated by the above law, regulations published there under and the
instruments 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,
including interest. As of December 31, 2002, management believes that the Company is
meeting all of the aforementioned conditions.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
tax-exempt income attributable to the Approved Enterprise can be distributed
to shareholders without subjecting the Company to taxes only upon the complete
liquidation of the Company. If these retained tax-exempt profits are distributed in a
manner other than in the complete liquidation of the Company they would be taxed at the
corporate tax rate applicable to such profits as if the Company had not elected the
alternative system of benefits, currently between 15%-20% for an Approved Enterprise.
As of December 31, 2002, the accumulated deficit of the Company does not include any
tax-exempt profits earned by the Companys Approved Enterprise.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company expects that during the period these tax losses are utilized, its income would be
substantially tax-exempt. Accordingly, there will be no tax benefit available from such
losses and no deferred income taxes have been included in these consolidated financial
statements.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Income
from sources other than the Approved Enterprise during the benefit period
will be subject to tax at the regular corporate tax rate of 36%.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------

| | Tax
benefits under the Law for the Encouragement of Industry (Taxes), 1969:
| | ---------------------------------------------------------------------------

| | The
Company and its Israeli subsidiary currently qualify as an industrial companyunder
the above law and, as such, are 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Measurement
of taxable income under the Income Tax (Inflationary Adjustments) Law, 1985:
| | ----------------------------------------------------------------------------------------

| | Results
for tax purposes are measured and reflected in real terms in accordance with the change
in the Israeli Consumer Price Index (CPI). As explained in Note 2, the
consolidated financial statements are presented in U.S. dollars. The differences between
the change in the Israeli CPI and in the NIS/U.S. dollar exchange rate causes a
difference between taxable income or loss and the income or loss before taxes reflected
in the consolidated financial statements. In accordance with paragraph 9(f) of SFAS No.
109, the Company has not provided deferred income taxes on this difference between the
reporting currency and the tax bases of assets and liabilities.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-24

---

---

# CERAGON NETWORKS LTD.
AND ITS SUBSIDIARIES

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS

---

# U.S. dollars in thousands

# NOTE 10:- TAXES ON
INCOME (Cont.)

| | Israeli
tax reform:
| | -------------------

| | On
January 1, 2003, a comprehensive tax reform took effect in Israel. Pursuant to the
reform, resident companies are subject to Israeli tax on income accrued or derived in
Israel or abroad. In addition, the concept of controller foreign corporation was
introduced, according to which an Israeli company may become subject to Israeli taxes on
certain income of a non-Israeli subsidiary if the subsidiarys primary source of
income is passive income (such as interest, dividends, royalties, rental income or
capital gains). The tax reform also substantially changed the system of taxation of
capital gains.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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
are as follows:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                    | December 31,
|--------------------------------------------------- | ------------
|
|Deferred tax assets:                                |             
|U.S. net operating loss carryforward                | $  1,256    
|Reserve and allowances                              | -           
|                                                    |             
|Total deferred tax asset before valuation allowance | 1,256       
|Valuation allowance                                 | (1,256)     
|                                                    |             
|Net deferred tax asset                              | $           
|                                                    |             

| | As
of December 31, 2002, the Companys subsidiary has provided valuation allowances of
approximately $ 1,916 in respect of deferred tax assets resulting from tax loss
carryforwards and other temporary differences. The net change in the valuation allowance
in the year 2002, amounted to $ 660. Management currently believes that since the
Companys subsidiary has a history of losses it is more likely than not that the
deferred tax regarding the loss carryforwards and other temporary differences will not be
realized in the foreseeable future.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Loss
before taxes is comprised as follows:
| | ------------------------------------------

|         | Year ended December 31,
|-------- | -----------------------
|
|Domestic | $ (11,660)             
|Foreign  | (1,216)                
|         |                        
|         | $ (12,876)             
|         |                        

F-25

---

---

# CERAGON NETWORKS LTD.
AND ITS SUBSIDIARIES

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS

---

# U.S. dollars in thousands

# NOTE 10:- TAXES ON
INCOME (Cont.)

| | Net
operating loss carryforwards:
| | ---------------------------------

| | The
Company has accumulated losses for Israel income tax purposes as of December 31, 2002, in
the amount of approximately $ 45,000. These losses may be carryforward (linked to
the Israeli CPI) and offset against taxable income in the future for an indefinite period.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2002, Ceragon Inc. had U.S. federal net operating loss carryforwards of
approximately $ 5,500, that can be carried forward and offset against taxable income
and expire during the years 2019 to 2022. 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Reconciliation
of the theoretical tax expense (benefit) to the actual tax expense (benefit):
| | --------------------------------------------------------------------------------------------

| | In
2000, 2001 and 2002 the main reconciling item of the statutory tax rate of the Company
(36%) to the effective tax rate (0%) is carryforward tax losses.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------

# NOTE 11:- NON-RECURRING
EXPENSES, NET

| | Non-recurring
expenses:
| | -----------------------

| | a. | In
the second quarter of 2001 the Board of Directors approved a restructuring
               plan to reduce operating expenses. Actions taken by the Company included a
               reduction in headcount and a closing of a secondary manufacturing
facility. The                Company recorded a non-recurring (restructuring) charge of
approximately                $ 4,750.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Issuance
of warrant to a supplier:
| | ----------------------------------

| | On
October 31, 2002, the Company entered into a supplementary arrangement with one of its
suppliers. In accordance therewith, the Company is obligated, among other things, to pay
the amount of $ 150, and to issue a warrant to purchase 700,000 Ordinary shares of
the Company (see also Note 9).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
restructuring charges recorded in 2001 included the abovementioned arrangement and,
therefore, $ 1,055 was utilized in 2002 from the remaining restructuring allowance.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2002 a provision for restructuring cost in the amount of $ 136 is
still recorded in respect of its lease agreement in June 2004.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------

F-26

---

---

# CERAGON NETWORKS LTD.
AND ITS SUBSIDIARIES

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS

---

# U.S. dollars in thousands

# NOTE 11:- NON-RECURRING
EXPENSES, NET (Cont.)

| | b. | In
2002 the Company decided to pursue an early termination or modification of
               one of its secondary lease obligations with an unrelated party. In
connection                with this, the Company reserved expenses which could result
from such early                lease termination or modification.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company accounts for these expenses according to EITF 88-10, Costs Associated with
Lease Modification or Termination. During 2002 the Company recorded non-recurring
expenses related to the lease obligation in an approximate amount of $ 1,125.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Non-recurring
income:
| | ---------------------

| | Non-recurring
income is related to sales of raw material to incidental customers in 2002. The net
profit from such sales in 2002 amounted to $1,042. Since these transactions do not
reflect the ordinary course of business of the Company it was classified as non-recurring
income.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
components of the non-recurring expenses (income) for the years 2000, 2001 and 2002, are
as follows:
| | --------------------------------------------------------------------------------------------------------

|                            | Year ended December 31,
|--------------------------- | -----------------------
|
|Non-recurring expenses      | $            -         
|Non-recurring income        | -                      
|                            |                        
|                            |                        
|Non-recurring expenses, net | $    -                 
|                            |                        

# NOTE 12:- SEGMENTS,
CUSTOMERS AND GEOGRAPHIC INFORMATION

| | The
Company adopted Statement of Financial Accounting Standard No. 131, Disclosures
About Segments of an Enterprise and Related Information,(SFAS No. 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, 2002, 2001 and 2000
and long-lived assets as of December 31, 2000, 2001 and 2002:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------

|                                               | Year ended December 31,
|---------------------------------------------- | -----------------------
|
|Revenues from sales to unaffiliated customers: |                        
|North America                                  | $ 15,922               
|Europe                                         | 11,168                 
|Latin America                                  | 77                     
|Middle East, Africa and Asia-Pacific           | 2,030                  
|                                               |                        
|                                               | $ 29,197               
|                                               |                        
|Long-lived assets, by geographic areas:       
|Israel                                         | $   6,630              
|United States                                  | 124                    
|Other                                          | 260                    
|                                               |                        
|                                               | $   7,014              
|                                               |                        

F-27

---

---

# CERAGON NETWORKS LTD.
AND ITS SUBSIDIARIES

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS

---

# U.S. dollars in thousands

# NOTE 12:- SEGMENTS,
CUSTOMERS AND GEOGRAPHIC INFORMATION (Cont.)

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

|           | Year ended December 31,
|---------- | -----------------------
|
|
|Customer A | 37                     
|Customer B | -                      
|Customer C | -                      
|Customer D | 19                     
|Customer E | -                      

| | (*) | Less
than 10%.
| | --- | --------------

# NOTE 13:- SELECTED
STATEMENTS OF OPERATION DATA

| | a. | Selling
and marketing expenses, net
| | -- | -----------------------------------

|              | Year ended December 31,
|------------- | -----------------------
|
|Total cost    | $ 9,023                
|Less - grants | 233                    
|              |                        
|              |                        
|              | $ 8,790                
|              |                        

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

|                                            |             |          |         
|------------------------------------------- | ----------- | -------- | --------
|
|inancial income:                            |             |          |         
|Interest on marketable securities           | $         - | $    694 | $    711
|Interest on bank deposits                   | 2,616       | 2,148    | 760     
|Foreign currency translation differences    | 56          | 178      | 363     
|Other                                       | 12          | -        | 85      
|                                            |             |          |         
|                                            | 2,684       | 3,020    | 1,919   
|                                            |             |          |         
|Financial expenses:                        
|Interest in respect of bank credit and bank
|commissions                                 | 185         | 91       | 115     
|Foreign currency translation differences    | 21          | 122      | 241     
|Other                                       | 8           | 38       | 35      
|                                            |             |          |         
|                                            | 214         | 251      | 391     
|                                            |             |          |         
|Financial income, net                       | $ 2,470     | $ 2,769  | $ 1,528 
|                                            |             |          |         

F-28

---

---

# CERAGON NETWORKS LTD.
AND ITS SUBSIDIARIES

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS

---

# U.S. dollars in thousands

# NOTE 14:- 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 a director and principal
shareholder of the Company. They are brothers who, as of December 31, 2002, together
control 25.3% of the company. Individually or together, they are also founders, directors
and principal shareholders of several other companies which are known as the RAD-BYNET
group
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Members
of the RAD-BYNET group provide the Company on an as-needed basis with finance, legal,
management information systems, marketing, and administrative services, and the Company
reimburse each company for its costs in providing these services. The aggregate amount of
these expenses was approximately $ 175 in 2002.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company leases its office space for its current headquarters and principal
administrative, finance, marketing and sales operations from real estate holding
companies controlled by Yehuda and Zohar Zisapel. The lease for this facility will expire
in May 2005. The Company also leases additional space in adjacent buildings from
companies controlled by Zohar Zisapel and Yehuda Zisapel. The aggregate amount of rent
and maintenance expenses related to these properties was approximately $1.1 million in
2002
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company purchases components from other members of the RAD-BYNET group that it integrates
into its products. The aggregate purchase price of these components was approximately
$200 thousand for the year ended December 31, 2002.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a. | Transactions
with related party:
| | -- | --------------------------------

|                                    | Year ended December 31,
|----------------------------------- | -----------------------
|
|Cost of sales                       | $      1,533           
|                                    |                        
|                                    |                        
|Research and development expenses   | $          326         
|                                    |                        
|                                    |                        
|Selling and marketing expenses      | $          248         
|                                    |                        
|                                    |                        
|General and administrative expenses | $          256         
|                                    |                        
|                                    |                        
|Restructuring                       | $                -     
|                                    |                        
|                                    |                        
|Financing expenses (income)         | $              77      
|                                    |                        

F-29

---

---

# CERAGON NETWORKS LTD.
AND ITS SUBSIDIARIES

# NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS

---

# U.S. dollars in thousands

# NOTE 14:- RELATED PARTY
BALANCES AND TRANSACTIONS (Cont.)

|   |                                                     | December 31,
|-- | --------------------------------------------------- | ------------
|
|b. | Balances with related parties:                      |             
|   | Trade payables, other payables and accrued expenses | $ 95        
|   |                                                     |             
|   |                                                     |             
|   | Other receivables                                   | $ 14        
|   |                                                     |             

# NOTE 15:- SUBSEQUENT
EVENT

| | a. | On
January 15, 2003, the Company established a wholly-owned subsidiary in India,
               Ceragon Networks (India) Private Limited.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------

| | b. | In
April 2003, the Board of Directors adopted the 2003 Share Option Plan. This
               plan complies with recent changes in Israeli tax law with respect to stock
               options. It is also intended to be a qualified plan as defined
by                the U.S. Tax Code. The worldwide employees, directors and consultants
are                eligible to participate in this plan.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-30

---

---

# 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/ Shraga Katz
Name: Shraga KatzTitle:   President and            Chief Executive Officer
Date:  May 25, 2003 |  | 
|------------------------------------------------------------------------------------------------------------------------------------------------------ |  | 

64

---

---

CERTIFICATION

I, Shraga Katz, Chief Executive Officer of Ceragon Networks Ltd., certify that:

1. I have reviewed this annual report on Form 20-F of Ceragon Networks Ltd.;

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

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

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

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

b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior
to the filing date of this annual report (the "Evaluation Date"); and

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

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

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

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

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

|Date:   May 25, 2003CERAGON NETWORKS LTD.By: /s/ Shraga Katz 
Name:  Shraga KatzTitle:    President and
             Chief Executive Officer |  | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 

65

---

---

CERTIFICATION

I, Ran Oz, Chief Financial Officer of
Ceragon Networks Ltd., certify that:

1.
          I have reviewed this annual report on Form 20-F of Ceragon Networks Ltd.;

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

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

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

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

b)
          evaluated the effectiveness of the registrants disclosure controls and
          procedures as of a date within 90 days prior to the filing date of this annual
          report (the Evaluation Date); and

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

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

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

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

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

|Date:   May 25, 2003CERAGON NETWORKS LTD.By: /s/ Ran Oz 
Name:  Ran OzTitle:    Chief Financial Officer |  | 
|--------------------------------------------------------------------------------------------------------------------- |  | 

66

---

---

# EXHIBITS

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

|1.2 | Articles
of Association**
|--- | -------------------------

|4.1 | Tenancy
Agreement, dated as of February 22, 2000, by andamong Ceragon, Zisapel
Properties Ltd. and Klil & MichaelProperties Ltd. (English translation)***
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------

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

|10.1 | Consent
of Independent Auditors
|---- | -------------------------------

|10.2 | Certification
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section906 of          the
Sarbanes-Oxley Act of 2002
|---- | ------------------------------------------------------------------------------------------------------------------------------

---

* Previously filed as exhibit 3.1 in
connection with the Ceragon's Registration Statement on Form F-1 (Registration Statement
333-12312) on August 3, 2000 and incorporated herein by reference.

** Previously filed as exhibit 3.2
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.



---

---

Exhibit 8.1

List of Subsidiaries

|Company                                  | Jurisdiction of
Incorporation
|---------------------------------------- | -----------------------------
|Ceragon Networks (UK) Limited            | England                      
|Ceragon Networks SARL                    | France                       
|Ceragon Networks Gmbh                    | Germany                      
|Ceragon Networks (HK) Limited            | Hong Kong                    
|Ceragon Networks, S.A. de C.V            | Mexico                       
|Ceragon Networks, Inc.                   | New Jersey                   
|Ceragon Networks do Brasil Limitada      | Brazil                       
|Ceragon Networks (India) Private Limited | India                        



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Exhibit 10.1

# CONSENT OF INDEPENDENT
AUDITORS

We
consent to the incorporation by reference in Registration Statement (Form S-8 No.
333-54356) of our report dated, February 6, 2003, with respect to the consolidated
financial statements of Ceragon Networks Ltd. included in the Annual Report (Form 20-F)
for the year ended December 31, 2002.

|Tel-Aviv, IsraelMay 25, 2003 |  | /s/ KOST FORER and GABBAY
KOST FORER and GABBAYA Member of Ernst & Young Global
|---------------------------- |  | ---------------------------------------------------------------------------------------------



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Exhibit 10.2

# CERTIFICATION PURSUANT
TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report
of Ceragon Networks Ltd., (the Company) on Form 20-F for the period ending
December 31, 2002, as filed with the Securities and Exchange Commission on the date hereof
(the Report), the undersigned hereby certify that to the best of our
knowledge:

| | 1. | The
Report fully complies with the requirements of Section 13(a) of the
                    Securities Exchange Act of 1934; and
| | -- | --------------------------------------------------------------------------------------------------------------------------------

| | 2. | The
information contained in the Report fairly presents, in all material
                    respects, the financial condition and results of operations of the
Company.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Date: May 25, 2003 |  | /s/ SHRAGA KATZ
Name:  Shraga KatzTitle:    President and Chief Executive Officer
|------------------ |  | -----------------------------------------------------------------------------------------------

|Date: May 25, 2003 |  | /s/ RAN OZ
Name:  Ran OzTitle:    Chief Financial Officer
|------------------ |  | -----------------------------------------------------------------------



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