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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 20-F/A
 (Amendment No. 1)
 o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF
1934
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year endedDecember 31, 2006
  o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  o
    
    SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission
file number 0-30862
 
 CERAGON NETWORKS LTD
 (Exact name of Registrant as specified in its charter)
 
 (Jurisdiction of incorporation or organization)
 (Address of principal executive offices)
 
  Ordinary Shares, Nominal Value NIS 0.01
    
    Nasdaq Global Market(Title of each Class)
    
    (Name of Exchange on which Registered)
     o þ
  o þ
  þ o
  o þ o
  o þ
  o þ




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TABLE OF CONTENTS
 PagePART IITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT
AND ADVISERS
    
    
    3ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
    
    
    3ITEM 3. KEY INFORMATION
    
    
    3ITEM 4. INFORMATION ON THE COMPANY
    
    
    25ITEM 4A. UNRESOLVED STAFF COMMENTS
    
    
    46ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
    
    
    47ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
    
    
    63ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
    
    
    84ITEM 8. FINANCIAL INFORMATION
    
    
    87ITEM 9. THE OFFER AND LISTING
    
    
    89ITEM 10. ADDITIONAL INFORMATION
    
    
    90ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
    
    
    100ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY
SECURITIES
    
    
    101PART IIITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
    
    
    101ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY
HOLDERS AND USE OF PROCEEDS
    
    
    101ITEM 15. CONTROLS AND PROCEDURES
    
    
    102ITEM 16. [RESERVED]
    
    
    103ITEM16A. AUDIT COMMITTEE FINANCIAL EXPERT
    
    
    103ITEM 16B. CODE OF ETHICS
    
    
    104ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    104ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
    
    
    104ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
    
    
    105PART IIIITEM 17. FINANCIAL STATEMENTS
    
    
    106ITEM 18. FINANCIAL STATEMENTS
    
    
    106ITEM 19. EXHIBITS
    
    
    106EX-12.1: CERTIFICATIONEX-12.2: CERTIFICATIONEX-13.1: CERTIFICATION




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EXPLANATORY NOTE
   INTRODUCTION
 Definitions
  
    
    references to Ceragon, the Company, us, we and our refer to Ceragon
Networks Ltd. (the Registrant), an Israeli company, and its consolidated
subsidiaries;
    
    references to ordinary shares, our shares and similar expressions refer to the
Registrants Ordinary Shares, NIS 0.01 nominal (par) value per share;
    
    references to dollars, U.S. dollars and $ are to United States Dollars;
    
    references to shekels and NIS are to New Israeli Shekels, the Israeli currency;
    
    references to the Companies Law are to Israels Companies Law, 5759-1999; and
    
    references to the SEC are to the United States Securities and Exchange Commission.
 Cautionary Statement Regarding Forward-Looking Statements
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2




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PART I
 
 ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
  
 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
  
 ITEM 3. KEY INFORMATION
 Selected Financial Data
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Year ended December 31,2002
    
    
    2003
    
    
    2004
    
    
    2005(1)
    
    
    2006(In thousands, except share and per share data)Consolidated Statement of Operations
Data:Revenues
    
    $
    18,394
    
    
    $
    34,421
    
    
    $
    54,831
    
    
    $
    73,777
    
    
    $
    108,415Cost of revenues(2)(3)
    
    
    13,005
    
    
    
    20,755
    
    
    
    32,227
    
    
    
    52,487
    
    
    
    80,776Gross profit (loss)
    
    
    5,389
    
    
    
    13,666
    
    
    
    22,604
    
    
    
    21,290
    
    
    
    27,639Operating expenses:Research and development
    
    
    10,101
    
    
    
    9,346
    
    
    
    9,772
    
    
    
    10,713
    
    
    
    13,336Less: grants and participants
    
    
    1,870
    
    
    
    1,976
    
    
    
    2,293
    
    
    
    1,752
    
    
    
    1,543Research and development, net
    
    
    8,231
    
    
    
    7,370
    
    
    
    7,479
    
    
    
    8,961
    
    
    
    11,793Selling and marketing
    
    
    10,202
    
    
    
    9,967
    
    
    
    11,841
    
    
    
    13,629
    
    
    
    17,420General and administrative
    
    
    2,761
    
    
    
    2,482
    
    
    
    2,485
    
    
    
    3,200
    
    
    
    5,217Restructuring and non-recurring income
    
    
    83
    
    
    
    (704
    )
    
    
    
    
    
    
    
    
    
    
    Total operating expenses
    
    
    21,277
    
    
    
    19,115
    
    
    
    21,805
    
    
    
    25,790
    
    
    
    34,430Operating profit (loss)
    
    
    (15,888
    )
    
    
    (5,449
    )
    
    
    799
    
    
    
    (4,500
    )
    
    
    (6,791
    )Financing income, net
    
    
    1,528
    
    
    
    1,159
    
    
    
    674
    
    
    
    607
    
    
    
    1,284Other financial expenses  non-cash
charge relating to puttable warrant
    
    
    
    
    
    
    (3,432
    )
    
    
    
    
    
    
    
    
    
    
    Other income
    
    
    
    
    
    
    
    
    
    
    141
    
    
    
    66
    
    
    
    47Net income (loss)
    
    
    (14,360
    )
    
    
    (7,722
    )
    
    
    1,614
    
    
    
    (3,827
    )
    
    
    (5,460
    )Basic net earnings (loss) per share
    
    $
    (0.64
    )
    
    $
    (0.33
    )
    
    $
    0.06
    
    
    
    (0.15
    )
    
    
    (0.20
    )Diluted net earnings (loss) per share
    
    $
    (0.64
    )
    
    $
    (0.33
    )
    
    $
    0.06
    
    
    
    (0.15
    )
    
    
    (0.20
    )Weighted average number of shares
used in computing basic earnings
(loss) per share
    
    
    22,375,939
    
    
    
    23,063,160
    
    
    
    25,066,937
    
    
    
    26,137,121
    
    
    
    26,728,053Weighted average number of shares
used in computing diluted earnings
(loss) per share(4)
    
    
    22,375,939
    
    
    
    23,063,160
    
    
    
    28,069,844
    
    
    
    26,137,121
    
    
    
    26,728,053
 
 (1)
    
    The amortization of deferred share compensation presented in previous years was reclassified
in the relevant expense line.(2)
    
    In 2005, the amount includes $7,082 related to a write-off of inventories and $390 related to
long-term receivables.(3)
    
    In 2006, the amount includes a one-time charge of $10,444 related to an agreement with the
Office of the Chief Scientist to terminate our grant program.(4)
    
    Except for 2004, all outstanding share options have been excluded from the calculation of
diluted net loss per share because all these securities are antidilutive for the periods
presented. 4




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Year ended December 31,2002
    
    2003
    
    2004
    
    2005
    
    2006(In thousands)Consolidated Balance Sheet Data:Cash and cash equivalents,
short and long term bank
deposits, short and long term
marketable securities
    
    $
    43,173
    
    
    $
    39,046
    
    
    $
    37,801
    
    
    $
    33,022
    
    
    $
    29,485Working capital
    
    
    30,386
    
    
    
    30,481
    
    
    
    38,827
    
    
    
    34,871
    
    
    
    47,268Total assets
    
    
    61,640
    
    
    
    62,428
    
    
    
    73,111
    
    
    
    73,992
    
    
    
    96,351Total long term liabilities
    
    
    1,825
    
    
    
    2,451
    
    
    
    2,986
    
    
    
    3,424
    
    
    
    12,277Shareholders equity
    
    
    49,266
    
    
    
    48,683
    
    
    
    52,187
    
    
    
    49,189
    
    
    
    47,561
 Risk Factors
  Risks Relating to Our Business
 We have a history of operating and net losses. We may not operate profitably in the future.
  Global competition and current market conditions in India and other parts of Asia have resulted in
downward pressure on the prices for our products, which could result in reduced revenues, gross
margins and profitability.
  5




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We face intense competition from other wireless equipment providers. If we fail to compete
effectively, our business, financial condition and results of operations would be materially
adversely affected.
    6




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We face intense competition from other high-speed communications solutions that compete with our
high-capacity point-to-point wireless products, which could reduce demand for our products and have
a material adverse effect on our business and results of operations.
   
    
    Extreme Weather Conditions:wireless backhaul solutions may not operate optimally in
certain extreme weather conditions, including severe rainfalls or hurricanes; and
    
    Line-of-Sight Limitations:wireless backhaul solutions generally require a direct
line-of-sight between antennas. Consequently, service providers often install these
solutions on wireless antenna towers, rooftops of buildings and on other tall
structures. As a result, service providers must generally secure roof or other property
rights from the owners of each building or other structure on which our products are
installed. This may delay deployment and increase the installation costs. Some base
stations cannot be linked by line-of-sight solutions.
  We are dependent upon sales of our FibeAir ® family of products into a single market. Any
reduction in demand for these products in this market would cause our revenues to decrease.
 ® ® ®
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We sell a significant portion of our products through a small number of strategic relationships
with OEMs at gross margins that are lower than the gross margins for our sales directly to
customers, which lowers our overall gross margin. In addition, the loss of one or more of these key
OEM relationships would result in a significant loss of revenues.
      We cannot assure you that we will be able to sustain our recent revenue growth rate which may
reduce our share price.
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We may face problems in managing the growth of our business.
   
    
    manufacture (through our contract manufacturers) and deliver our products to our
customers in a timely manner;
    
    develop efficient forecast methods for evaluating the prospective quantity of
products that will be ordered by our customers;
    
    control inventories of components ordered by our contract manufacturers required to
meet actual demand;
    
    streamline and automate processes in order to manufacture, ship and deliver on time
larger quantities of equipment than in previous years;
    
    reduce the costs of manufacturing our products;
    
    balance the need to hire and train new employees with the need to minimize
costs; and
    
    maintain the capital resources needed to finance such growth.
  Consolidation of our potential customer base could harm our business.
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We rely on a limited number of contract manufacturers to manufacture our products and if they
experience delays, disruptions, quality control problems or a loss in capacity, it could materially
adversely affect our operating results.
   Our contract manufacturers obtain some of the components included in our products from a limited
group of suppliers and, in some cases, single or sole source suppliers. The loss of any of these
suppliers could cause us to experience production and shipment delays and a substantial loss of
revenue.
  
    
    The component suppliers may experience shortages in components and interrupt or
delay their shipments to our contract manufacturers. Consequently, these shortages
could delay the manufacture of our products and shipments to our customers which could
result in penalties and/or cancellation of orders for our products.
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
    
    The component suppliers could discontinue the manufacture or supply of components
used in our systems. In such an event, our contract manufacturers or we may be unable
to develop alternative sources for the components necessary to manufacture our
products, which could force us to redesign our products. Any such redesign of our
products would likely interrupt the manufacturing process and could cause delays in our
product shipments. Moreover, a significant modification in our product design may
increase our manufacturing costs and bring about lower gross margins.
    
    The component suppliers may increase component prices significantly at any time and
with immediate effect, particularly if demand for certain components increases
dramatically in the global market. These price increases would increase component
procurement costs and could significantly reduce our gross margins and profitability.
 Our ability to grow depends on acceptance by our customers of IP-based solutions and our ability to
develop and introduce IP-based products.
  The creation of NSN may lead to fewer purchases of our products by NSN, which would significantly
reduce our revenues.
  If we do not succeed in developing and marketing new products that keep pace with technological
developments, changing industry standards and our customers needs, we may not be able to grow our
business.
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
    
    develop and market new products in a timely manner to keep pace with developments in
technology;
    
    meet evolving customer requirements;
    
    enhance our current product offerings, including technological improvements which
reduce the cost and manufacturing time; and
    
    deliver products through appropriate distribution channels.
   We rely on a limited number of contractors as part of our research and development efforts.
  
    
    increase our research and development expenses;
    
    delay the introduction of our upgraded and new products to current and prospective
customers and our penetration into new markets; and
    
    adversely affect our ability to compete.
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Our sales cycles in connection with competitive bids or to prospective customers are lengthy.
  We sell other manufacturers products as an OEM, which subjects us to various risks that may cause
our revenues to decline.
  Our products are used in critical communications networks which may subject us to significant
liability claims.
  13




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Uncertainty and possible delays in deployment of advanced wireless and other networks could cause
our revenues to be lower than expected.
  Due to the growing volume of our sales to developing countries, we are susceptible to a number of
political and economic risks that could have a material adverse effect on our business, financial
condition and results of operations.
  
    
    unexpected changes in regulatory requirements;
    
    fluctuations in foreign currency exchange rates;
    
    imposition of tariffs and other barriers and restrictions;
    
    management and operation of an enterprise spread over various countries;
    
    burden of complying with a variety of foreign laws;
    
    general economic and geopolitical conditions, including inflation and trade
relationships;
    
    longer sales cycles;
    
    difficulties in protecting intellectual property;
    
    laws and business practices favoring local competitors;
    
    demand for high-volume purchases with discounted prices;
    
    payment delays and uncertainties; and
    
    war and acts of terrorism.
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We are increasingly engaged in supplying installation or turnkey projects for our customers which
are subject to acceptance testing procedures. Any delay or failure in such acceptance tests would
have a material adverse effect on our results of operations.
  If we fail to obtain regulatory approval for our products, or if sufficient radio frequency
spectrum is not allocated for use by our products, our ability to market our products may be
restricted.
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Our products may not meet the new European governmental regulations, including environmental
standards, required for their sale, which may negatively affect our sales.
  Widespread use of wireless products may have health and safety risks.
  Part of our inventory may be written off, which would increase our cost of revenues. In addition,
we may be exposed to inventory-related losses on inventories purchased by our contract
manufacturers.
  
    
    new generations of products replacing older ones, as was the case in 2005;
    
    the need of our contract manufacturers to order raw materials that have long lead
times and our inability to estimate exact amounts and types of items thus needed,
especially with regard to the frequencies in which the final products ordered will
operate; and
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
    
    changes in products because of technological advances and cost reduction measures.
      If we are unable to protect our intellectual property rights, our competitive position may be
harmed.
    17




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Defending
against intellectual property infringement claims could be expensive and could disrupt
our business.
  If we fail to attract and retain qualified personnel, our business, operations and product
development efforts may be materially adversely affected.
  Our international operations expose us to the risk of fluctuation in currency exchange rates.
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If we are characterized as a passive foreign investment company, our U.S. shareholders may suffer
adverse tax consequences, including higher tax rates and potentially punitive interest charges on
the proceeds of share sales.
   Our operating results may vary significantly from quarter to quarter and these quarterly variations
in operating results, as well as other factors, may contribute to the volatility of the market
price of our shares.
  
    
    volume and timing of product orders received and delivered during the quarter;
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
    
    the ability of our contract manufacturers to manufacture products on time;
    
    the timing of when our customers provide acceptance certificates in turnkey
projects;
    
    timing of new product introductions by us or our competitors;
    
    changes in the mix of products sold by us;
    
    cost and availability of components and subsystems;
    
    adoption of new technologies and industry standards;
    
    competitive factors, including pricing, availability and demand for competing
products;
    
    ability of our customers to obtain financing to enable their purchase of our
products;
    
    fluctuations in foreign currency exchange rates;
    
    worldwide regulatory developments; and
    
    general economic conditions in the United States and internationally.
  
    
    announcements of technological innovations;
    
    customer orders or new products or contracts;
    
    competitors positions in the market;
    
    changes in financial estimates by securities analysts;
    
    our earnings releases and the earnings releases of our competitors; and
    
    the general state of the securities markets (with particular emphasis on the
technology and Israeli sectors thereof).
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Due to the size of their shareholdings, Yehuda and Zohar Zisapel have influence over matters
requiring shareholder approval.
  Provisions of our Articles of Association, Memorandum of Association and Israeli law could delay,
prevent or make difficult a change of control and therefore depress the price of our shares.
   Risks Relating to Our Location in Israel
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Conditions in Israel may limit our ability to produce and sell our products. This could result in a
decrease of our revenues.
    22




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Since we received Israeli government grants for research and development expenditures, we are
subject to ongoing restrictions and conditions, including restrictions on our ability to
manufacture products and transfer technologies outside of Israel.
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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 tax benefits available to approved enterprise programs may be reduced or eliminated in the
future. This would likely increase our tax liability.
  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.
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
    
    the judgment was given by a court which was, according to the laws of the state of
the court, competent to give it;
    
    the judgment is executory in the state in which it was given;
    
    the judgment is no longer appealable;
    
    the judgment was not given by a court that is not competent to do so under the rules
of private international law applicable in Israel;
    
    there has been due process;
    
    the obligation imposed by the judgment is enforceable according to the rules
relating to the enforceability of judgments in Israel and the substance of the judgment
is not contrary to public policy;
    
    the judgment was not obtained by fraud and does not conflict with any other valid
judgment in the same matter between the same parties; and
    
    an action between the same parties in the same matter is not pending in any Israeli
court or tribunal at the time the lawsuit is instituted in the U.S. court.
  
 ITEM 4. INFORMATION ON THE COMPANY
 A.
    
    History and Development of the Company
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B. Business Overview
    
    
    Strong rises in the quantity of data traffic. The rising uptake of data-intensive
applications (video and music downloads, wireless Internet, etc.), together with a
continuous rise in the number of global cellular subscribers, has significantly increased
the load on backhaul capacity. For many cellular operators with existing networks
(especially in developed regions), backhaul has become a traffic bottleneck that impacts
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the performance of the entire network, necessitating an expansion of the backhaul segment to
assure current and future service quality.
    
    Rapid build-out of new cellular networks in developing regions. Demand for cellular
voice and data services continues to grow in many developing regions (e.g. India,
Asia-Pacific, Africa), many of which have little existing wireline telecommunications
infrastructure. In these regions, end-to-end wireless networks have proven to be
particularly desirable, as they are much quicker and more cost-effective to install than
comparable wireline solutions.
      Industry Background: Market Trends
 Wireless solutions as compared to other backhaul options:
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
    
    Leased copper or fiber-optic linesfrom ILECs have been readily available to cellular
operators in many regions. However, their usage has been tied to the payment of an
expensive monthly fee, and in some cases requires the cellular operator to become dependent
upon a direct competitor. In addition, the leasing of copper lines saddles the cellular
operator with an absolute capacity problem which limits their ability to scale to meet the
network demands dictated by todays higher levels of voice and data traffic.
    
    Laying of new fiber-optic cableis a reliable option that provides the operator with
maximum bandwidth at low operating costs. However, the laying of new cables is a
time-consuming and expensive process, and in many urban or geographically dispersed regions
is very difficult to achieve.
    
    Wireless links:High-capacity, carrier-grade wireless backhaul systems such as
Ceragons represent a scalable, quick-to-deploy solution at a reasonable capital cost. Once
installed, they belong to the operator, releasing them from dependence on  and cost of -
the lines of a competitor or a third party.
  
    
    A continuous rise in the number of mobile subscribers, translating into an increase in
the number of base stations and cell sites, which has in turn increased the need for
backhaul transmission capacity. Demand for cellular voice services continues to grow
strongly in emerging markets (rural areas and developing countries), while demand for more
data-intensive 3G services is growing in many markets where voice coverage is already high.
    
    Growing demand for new higher-data services:As demand grows for data-intensive
services (mobile Internet, mobile TV, mobile gaming, downloadable music, MMS, video
conferencing, etc.), backhaul capacity becomes a constraining factor, representing a costly
bottleneck. To handle packetized voice and data services with existing TDM backhaul
networks, some mobile operators must multiply the leased lines dedicated to each cell site,
thereby eroding the profitability of their services. These considerations significantly
enhance the business proposition of migration to a wireless and IP-optimized wireless
backhaul solution.
    
    Migration to IP-based backhaul platforms:Since circuit switched (TDM) networks were
designed to handle voice traffic, they are not ideal for the transmission of data-intensive
services. The increased traffic of data services is causing more operators to want to
upgrade to an IP-based network, and with it an IP-based backhaul solution.
    
    The emergence of all-IP networks:There are several technologies that are being
developed in order to upgrade existing mobile networks. These technologies, generally
referred to as fourth generation or 4G, are based on IP. They include
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The Ceragon Solution
   
    
    Indoor units convert the transmission signals from digital to intermediate or radio
frequency signals and vice versa; process and manage information transmitted to and from
the outdoor unit; aggregate multiple transmission signals and provide a physical interface
to wireline networks.
    
    Outdoor units are used to control power transmission, convert IF (intermediate
frequency) signals to RF (radio frequency) signals and vice versa, and to provide an
interface between antennas and indoor units. These compact, high   performance devices are
contained in compact weather-proof enclosures fastened to antennas. Indoor units are
connected to outdoor units by standard coaxial cables.
    
    Antennas are used to transmit and receive microwave radio signals from and to edge and
core networks. These compact, high-performance devices are mounted on poles which are
typically placed on rooftops, towers or buildings. We rely on third party vendors to
supply this component.
    
    End-to-End Network Management. Our network management system uses simple network
management protocol to monitor and control managed devices at both the element and network
level and can be easily integrated into our customers existing network management systems.
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Product Portfolios
   IP Portfolio
 FibeAir IP-MAX
  Multi-Service Portfolio
  FibeAir 4800
 High Capacity SDH Portfolio
 FibeAir 1500
 High Capacity PDH/Ethernet Hybrid Solution
 FibeAir 640P
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Long-Haul Wireless Solution
 FibeAir 1500HP
 Trunk Radio Solution
 FibeAir 3200T
 End-to-End Network Management
 
    
    CeraView® is Ceragons SNMP-based EMS (Element Management System) that enables the
operator to perform element configuration, RF and SDH performance monitoring, remote
diagnostics, alarm reports and more. CeraView integrates with different 3rd party NMS
(Network Management System) platforms to provide end-to-end system management.
    
    PolyView is Ceragons NMS server that includes CeraMap, its friendly yet
powerful client graphical interface. PolyView can be used to update and monitor network
topology status, provide statistical and inventory reports, define end-to-end traffic
trails, download software and configure elements in the network. In addition, it can
integrate with Northbound NMS platforms, to provide enhanced network management.
 Advantages of Ceragons Products:
  
    
    High-Speed, High-Quality Communications. Our products enable the delivery of
full-duplex, high-speed Internet access and integrated data, video and voice communications
at superior transmission speeds (50-900 Mbps over licensed bands and up to 1.25 Gbps
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over unlicensed frequency bands). Our products deliver fiber-like transmission quality with
error rates of less than one error per ten trillion bits transmitted.
    
    Native IP/Fast Ethernet/Gigabit Ethernet Platform. Our IP products offer native Fast
and Gigabit Ethernet wireless transmission with fiber-like quality. With what management
believes is the highest available throughput on the market, this native Ethernet solution
with ultra-low latency (delay) is optimized for IP-based applications including mobile
backhauling, IP-DSLAM connectivity for voice over IP, Internet and video services, WiMAX
backhauling and any delay-sensitive application. Our carrier-class products are
upgradeable, with capacities starting from 50 to 900 Mbps. Our products deliver Gigabit
Ethernet for ultra-high capacity IP connections in metropolitan rings, high-speed access
connections and private networks over a dual-carrier system of up to 900 Mbps system. In
addition, our products deliver two Fast Ethernet channels over a single 200 Mbps system
where dynamic bandwidth allocation is used to share the overall capacity between the two
Fast Ethernet channels. Each Fast Ethernet channel can provide a separate, secure
connection to a business subscriber. With built-in Ethernet traffic balancing, quality of
service and multi-service transport of data and voice interfaces over a single radio
carrier, we substantially reduce the service providers costs by eliminating the need to
purchase external equipment or double the links.
    
    Cost Effectiveness. Our products enable operators to avoid the high costs associated
with the deployment of independent fiber optic networks, including the cost of digging up
streets, obtaining municipal permits and laying of fiber optic lines (which costs
approximately $130,000 per mile in municipal regions). Further, our wireless products can
be redeployed and reused at a negligible cost, making them ideal as a movable temporary
solution in areas where new cable is being laid. In comparison to leased lines, our
products have very low operating costs.
    
    Rapid Deployment and Time to Market.Our products can deployed within hours, allowing
operators to provide new services  and thereby to generate new revenues  more quickly
than with wireline equipment.
    
    Spectral efficiency to further increase capacity. With FibeAir platforms, traffic
capacity throughput and spectral efficiency are optimized for the desired channel
bandwidth. For maximum flexibility on the part of the user, channel bandwidths can be
selected together with a wide range of modulations. High spectral efficiency is ensured by
choosing the same bandwidth for double the capacity, via two carriers with vertical and
horizontal polarizations. This feature is implemented by a built-in cross polarization
interference canceller (XPIC) mechanism.
    
    Optimization for high capacity and long haul. Ceragons innovative long-haul products
were designed as a wireless networking solution for end-to-end, long-distance connectivity
allowing the deployment of voice and data services for fixed and mobile backhaul networks.
Our long-haul products can be installed as split-mount radio or all-indoor radio
installation. Ceragons unique embedded space diversity with dual-receiver architecture,
extremely high transmit power and IF combining algorithm guarantee superior performance and
errorless transmission. For operators this means a reliable
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solution that can use less equipment and smaller antennas, providing substantial savings on
initial investments and operating expenses.
    
    Multi-Protocol Options. Our products work with the most common transmission standards
used in communications networks around the world, including Ethernet, IP, SONET/SDH and ATM
protocols. All solutions offer an easy migration path to next-generation platforms.
    
    Variety of Frequency Bands. Service providers select the optimal available transmission
frequency based on the rainfall intensity in the transmission area and the desired
transmission range. Regulators grant licenses to operate and provide communication services
in various frequency bands in each region, although in some cases, a customer may be able
to operate in a band which is exempt from licensing processes. The regulated bands are
allocated by government licensing authorities for high-capacity transmissions in the
metropolitan area. Our products operate in the 6, 7, 8, 11, 13, 15, 18, 23, 26, 28, 29, 31,
32 and 38 GHz frequency bands, the principal licensed bands currently available for
commercial use throughout the world. In addition, some of our products are designed to
operate in the 2.4  5.85 GHz and 60 GHz unlicensed frequency bands.
    
    Meet Multiple Regulatory Standards. We design all our products to meet the most
stringent North American and European standards.
    
    Modular Architecture. Our products contain plug-in hot swappable units that can easily
be replaced or exchanged in the field. This allows us to standardize our manufacturing
process, while still manufacturing each product to meet the individual requirements of each
service provider. It also enables service providers to easily adapt our products for use in
different network environments.
    
    Integrated Multiple Access Design. By replacing a module in our basic product, a
service provider can allocate the transmission capacity and physical interfaces over
multiple transmission lines. This unique feature substantially reduces the service
providers costs by eliminating the need to purchase external equipment that would
otherwise be needed for this purpose.
    
    Scalability and Flexibility. We design our products to enable incremental deployment to
meet increased service demand. This allows the service providers to take a pay as you
grow approach, matching capital outlays with subscriber growth. As a result, our customers
can establish a wireless broadband network with a relatively low initial investment, in
comparison with fiber optic lines, and later expand the geographic coverage area of their
networks and increase the number of points that can be served on their networks as
subscriber demand increases.
    
    High Reliability and Availability. We design our products to match the reliability
standard required by service providers, including 99.999% (five nines) availability,
maintaining continuous connectivity with a maximum of five minutes of downtime per year.
This enables our customers to provide their subscribers with the same high availability as
is offered by incumbent carriers using fiber optic networks. In addition,
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our products can be configured to provide full redundancy by connecting two radio links over
the same frequency channel. This feature minimizes service interruptions.
    
    Encryption. In the security area, we offer a built-in, AES-based encryption solution.
Our user-friendly EncryptAir solution has been validated by the National Institute of
Standards and Technology (NIST) to the US Federal Information Processing Standards (FIPS)
140-2 Level 2 security standard that is required by certain US military end-users.
    
    Multiple Modulation Schemes. The FibeAir product family utilizes multiple modulation
schemes, including QPSK, 16, 32, 64, 128, and 256 QAM enabling broadband wireless service
providers to choose between increased range and increased spectral efficiency.
  
    
    Extreme Weather Conditions. Our products may not operate optimally in certain extreme
weather conditions, including severe rainfalls or hurricanes.
    
    Line-of-Sight Limitations. Since our products require a direct line-of-sight between
antennas, service providers often install our products on cellular antenna towers, rooftops
of buildings and on other tall structures. As a result, service providers must generally
secure roof or other property rights from the owners of each building or other structure on
which our products are installed. This may delay deployment and increase the installation
cost of our products or cause service providers not to install broadband wireless
equipment.
    
    Frequency Bands. To operate our products, service providers must in most cases have a
license to operate and provide communications services in the optimal available
transmission frequency, or acquire the right to do so from a licensee. If a service
provider is unable to secure such a license, it will not be able to operate and provide
wireless communications services in the optimal transmission frequency. This may deter a
service provider from deploying a wireless network.
 Customer Service and Support
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Customers and Markets
     Region
    
    2004
    
    2005
    
    2006(%)
    
    (%)
    
    (%)North America
    
    
    30
    
    
    
    27
    
    
    
    26EMEA*
    
    
    40
    
    
    
    49
    
    
    
    38Asia-Pacific
    
    
    26
    
    
    
    13
    
    
    
    30Latin America
    
    
    4
    
    
    
    11
    
    
    
    6
 
 *
    
    Europe, Middle East, and Africa Distribution Channels
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Manufacturing and Assembly
     Competition
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
    
    product performance, reliability and functionality;
    
    range and maturity of product portfolio, including the ability to provide both
circuit switch and IP
    
    solutions and therefore to provide a migration path for circuit-switched to IP-based
networks;
    
    cost; and
    
    deployment, support and technical service and experience and commitment to high
quality customer service.
  Intellectual Property
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Conditions in Israel
  Economic Conditions
   Trade Relations
   38




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Israeli Tax Considerations and Government Programs
  General Corporate Tax Structure in Israel
   The Law for the Encouragement of Capital Investments, 1959
 Tax Benefits before the 2005 amendment
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Tax Benefits under the 2005 Amendment
     41




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
    
    Similar to the currently available alternative route, exemption from corporate tax on
undistributed income for a period of two to ten years, depending on the geographic location
of the Benefited Enterprise within Israel, and a reduced corporate tax rate of 10% to 25%
for the remainder of the benefits period, depending on the level of foreign investment in
each year. Benefits may be granted for a term of seven to ten years, depending on the level
of foreign investment in the company. If the company pays a dividend out of income derived
from the Benefited Enterprise during the tax exemption period, such income will be subject
to corporate tax at the applicable rate (10%-25%) in respect of the gross amount of the
dividend that we may distribute. The company is required to withhold tax at the source at a
rate of 15% from any dividends distributed from income derived from the Benefited
Enterprise; and
    
    A special tax route, which enables companies owning facilities in certain geographical
locations in Israel to pay corporate tax at the rate of 11.5% on income of the Benefited
Enterprise. The benefits period is ten years. Upon payment of dividends, the company is
required to withhold tax at source at a rate of 15% for Israeli residents and at a rate of
4% for foreign residents.
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Grants under the Law for the Encouragement of Industrial Research and Development, 1984
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Tax Benefits and Grants for Research and Development
  
    
    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.
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Tax Benefits under the Law for the Encouragement of Industry (Taxes), 1969
   
    
    deduction of purchases of know-how, patents and the right to use a patent over an
eight-year period for tax purposes;
    
    deduction over a three-year period of specified expenses incurred with the issuance and
listing of shares on the Tel Aviv Stock Exchange or on a recognized stock exchange outside
of Israel; and
    
    the right to elect, under specified conditions, to file a consolidated tax return with
additional related Israeli industrial companies.
   Special Provisions Relating to Taxation under Inflationary Conditions
  45




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C. Organizational Structure
  Company
    
      Place of Incorporation
    
    Ownership InterestCeragon Networks (Aus) Pty Ltd
    
    Australia
    
    
    100
    %Ceragon Networks do Brasil Limitada
    
    Brazil
    
    
    100
    %Ceragon Networks (UK) Limited
    
    England
    
    
    100
    %Ceragon Networks SARL
    
    France
    
    
    100
    %Ceragon Networks (HK) Limited
    
    Hong Kong
    
    
    100
    %Ceragon Networks (India) Private Limited
    
    India
    
    
    100
    %Ceragon Networks, S.A. de C.V.
    
    Mexico
    
    
    100
    %Ceragon Networks, Inc.
    
    New Jersey
    
    
    100
    %Ceragon Networks (Philippines), Inc.
    
    Philippines
    
    
    100
    %
 D. Property, Plants and Equipment
   
 ITEM 4A. UNRESOLVED STAFF COMMENTS
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ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
 The following discussion and analysis should be read in conjunction with our consolidated
financial statements 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
    Industry Trends
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
    
    Growing Number of Global Wireless Subscribers.Growth in the number of global
wireless subscribers is being driven by the availability of inexpensive cellular phones
and more affordable wireless service, particularly in developing countries and emerging
markets, and is being addressed by expanding wireless networks and by building new
networks.
    
    Increasing Demand for Premium Mobile Data Services.Wireless service providers are
facing increasing demand from subscribers for premium mobile data services, including
Internet browsing, music and video.
    
    Transition to IP-based Networks.Wireless service providers are beginning to deploy
all-IP networks and upgrade their infrastructure to interface with an IP-based core
network in order to increase network efficiency, lower operating costs and more
effectively deliver high-bandwidth data services.
  
    
    Increased Competition:Our target market is characterized by vigorous, worldwide
competition for market share and rapid technological development. These factors have
resulted in aggressive pricing practices and downward pricing pressures, and growing
competition from both start-up companies and well-capitalized telecommunication systems
providers.
    
    Regional Pricing Pressures:In recent years we have increased sales of our products
in India and other parts of Asia in response to the rapid build-out of cellular
networks in those regions. For the year ended December 31, 2006, 30% of our revenues
were earned in the Asia/Pacific region. Sales of our products in these markets are
generally at lower gross margins in comparison to other regions.
    
    Transaction Size:Competition for larger equipment orders is increasingly intense
since the number of large equipment orders in any year is limited. Consequently, we
generally experience greater pricing pressure when we compete for larger orders as a
result of this increased competition and demand from purchasers for greater volume
discounts. As an increasing portion of our revenues is derived from large orders, we
believe that our business will be more susceptible to these pressures.
    
    Increased Sales Through OEMs:Sales through our OEM relationships result in lower
gross margins than sales directly to end-users through distributors and re-sellers. By
selling our products to OEMs, we rely in part on the sales and marketing efforts of the
OEMs, as well as on their post-sale support. For the year ended December 31, 2006,
sales to NSN, our largest OEM, represented approximately 17% of our revenues. We
anticipate that sales to OEMs will become an increasing part of our business in the
future.
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Certain Issues Affecting our Results of Operations
   49




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Results of Operations
 Revenues.
 Cost of Revenues.
 Operating Expenses
 Research and Development Expenses.
 Selling and Marketing Expenses.
 General and Administrative Expenses.
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Financial Income, Net.
 Taxes.
 Critical Accounting Policies and Estimates
   
    
    Revenue recognition;
    
    Inventory valuation;
    
    Provision for doubtful accounts; and
    
    Stock-based compensation expense.
 Revenue recognition.
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Inventory valuation.
 Provision for doubtful accounts.
 Stock-based compensation expense.
  52




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Comparison of Period to Period Results of Operations
  53




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Year Ended December 31,2004
    
    2005
    
    2006Revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of revenues
    
    
    58.8
    
    
    
    71.1
    
    
    
    74.5Gross profit
    
    
    41.2
    
    
    
    28.9
    
    
    
    25.5Operating expenses:Research and development
    
    
    17.8
    
    
    
    14.5
    
    
    
    12.3Less: Grants and participations
    
    
    4.2
    
    
    
    2.4
    
    
    
    1.4Research and development, net
    
    
    13.6
    
    
    
    12.1
    
    
    
    10.9Selling and marketing
    
    
    21.6
    
    
    
    18.5
    
    
    
    16.1General and administrative
    
    
    4.5
    
    
    
    4.3
    
    
    
    4.8Total operating expenses
    
    
    39.8
    
    
    
    35.0
    
    
    
    31.8Operating income (loss)
    
    
    1.5
    
    
    
    (6.1
    )
    
    
    (6.3
    )Financial income, net
    
    
    1.2
    
    
    
    0.8
    
    
    
    1.2Other income
    
    
    0.3
    
    
    
    0.1
    
    
    
    0.1Net income (loss)
    
    
    2.9
    
    
    
    (5.2
    )
    
    
    (5.0
    )
 Year ended December 31, 2005 compared to year ended December 31, 2006
 Revenues.
 Cost of Revenues.
 Gross Profit.
 
    
    the non-recurring expense which we incurred as a result of the termination of our
participation in the OCS grant program;
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
    
    increased revenues from sales to OEMs that have lower gross margins than direct
sales;
    
    increased revenues from sales to customers in certain Asian countries, especially
India, that have lower gross margins than sales in other regions; and
    
    increased revenues form larger customer orders, which typically involve volume
discounts that result in lower margins.
 Research and Development Expenses, Net.
 Selling and Marketing Expenses.
 General and Administrative Expenses.
 Financial Income, Net.
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Net Loss.


Year ended December 31, 2004 compared to year ended December 31, 2005


Revenues


Cost of Revenues




Research and Development Expenses, Net


Selling and Marketing Expenses


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##### Table of Contents



General and Administrative Expenses
 Financial Income, Net
 Net Income
 Impact of Inflation and Currency Fluctuations
    Israeli inflation
    
    NIS devaluationYear ended December 31
    
    rate %
    
    (appreciation) %2002
    
    
    6.5
    
    
    
    7.32003
    
    
    (1.9
    )
    
    
    (7.6
    )2004
    
    
    1.2
    
    
    
    (1.6
    )2005
    
    
    2.4
    
    
    
    6.82006
    
    
    (0.1
    )
    
    
    (8.2
    )
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Effects of Government Regulations and Location on the Companys Business
  Liquidity and Capital Resources
     
    
    our net loss of $5.5 million;
    
    a $12.4 million increase in trade receivables which was primarily attributable to
our increased revenues; and
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
    
    an $11.2 million increase in inventories which was primarily attributable to an
increase in finished goods.
  
    
    a $9.8 million increase in trade payables which was primarily attributable to growth
in the volume of our sales and related purchases of products from our contract
manufacturers; and
    
    a $7.9 million increase in short- and long-term payables attributable to our
termination of the OCS grant program.
  
    
    our net loss of $3.8 million; and
    
    an $8.1 million increase in trade receivables which was mainly attributable to an
increase in our revenues.
  
    
    a $3.0 million increase in trade payables; and
    
    a $2.9 million decrease in inventories mainly attributed to an inventory write off.
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Capital Expenditures
  Research and Development
    60




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Intellectual Property
  Off Balance Sheet Arrangements
  Tabular Disclosure of Contractual Obligations
 Payments due by period (in thousands of dollars)Less than 1
    
    
    
    
    
    
    
    
    
    More thanContractual Obligations
    
    Total
    
    year
    
    1-3 years
    
    3-5 years
    
    5 yearsOperating Lease Obligations1
    
    
    3,203
    
    
    
    1,514
    
    
    
    1,337
    
    
    
    196
    
    
    
    156Purchase Obligations2
    
    
    28,854
    
    
    
    28,854
    
    
    
    
    
    
    
    
    
    
    
    Obligation to OCS
    
    
    11,887
    
    
    
    3,963
    
    
    
    7,924
    
    
    
    
    
    
    
    Other long-term commitment3
    
    
    1,815
    
    
    
    1,815
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    45,759
    
    
    
    36,146
    
    
    
    9,261
    
    
    
    196
    
    
    
    156
 
 1.
    
    Consists of operating leases for our facilities and for vehicles.2.
    
    Consists of all outstanding purchase orders for our products.3.
    
    Our obligation for accrued severance pay under Israels Severance Pay Law as of December 31,
2006 was approximately $4.3 million, of which approximately $2.5 million was funded through
deposits in severance pay funds, leaving a net obligation of approximately $1.8 million. Recently Issued Accounting Standards
  61




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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 Directors and Senior Management
  Name
    
    Age
    
    PositionZohar Zisapel
    
    
    58
    
    
    Chairman of the Board of DirectorsIra Palti
    
    
    49
    
    
    President and Chief Executive OfficerNaftali Idan
    
    
    55
    
    
    Executive Vice President and Chief Financial
OfficerShlomo Tenenberg
    
    
    52
    
    
    Executive Vice President, Worldwide Marketing
and SalesHillik Rave
    
    
    55
    
    
    Executive Vice President, Worldwide OperationsSharon Ganot
    
    
    38
    
    
    Vice President, Human ResourcesUdi Gordon
    
    
    40
    
    
    Executive Vice President, Research and
DevelopmentNorman Kotler
    
    
    55
    
    
    General Counsel and Corporate SecretaryJoseph Atsmon
    
    
    58
    
    
    DirectorYael Langer
    
    
    42
    
    
    DirectorYair E. Orgler
    
    
    67
    
    
    DirectorAvi Patir
    
    
    58
    
    
    Director
 Zohar Zisapel
 Ira Palti
 63




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Naftali Idan
 Shlomo Tenenberg
 Hillik Rave
 Sharon Ganot
 Udi Gordon
 Norman Kotler
 64




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Joseph Atsmon
 Yael Langer
 Yair E. Orgler
 Avi Patir
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Compensation of Directors and Senior Management
  Salaries, fees,
    
    Pension, retirementcommissions and
    
    and other similarbonuses
    
    benefitsAll directors and
senior management as
a group, consisting
of 17 persons
    
    $
    1,680,000
    
    
    $
    400,000
   Board Practices
 Board of Directors
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Terms of Directors
     67




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Independent Directors
  External Directors
  
    
    the company;
    
    any entity controlling the company at the date of such persons appointment; or
    
    any entity controlled, at the date of such persons appointment or during the two
years preceding that date, by the company or by its control shareholder.
  
    
    an employment relationship;
    
    a business or professional relationship maintained on a regular basis;
    
    control; and
    
    service as an office holder.
   
    
    A public company may appoint an external director to serve as director in its wholly
owned and controlled subsidiaries, subject to certain conditions;
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
    
    A person who served as an external director in a target company which was merged
into the acquiring company shall not be deemed to have an affiliation with the
acquiring company;
    
    A person who had an affiliation with a corporation (other than the public company or
other corporation under its control) which is under the control of the controlling
shareholder of a public company, only in such period in which such controlling
shareholder was not the controlling shareholder of the public company, shall not be
deemed to have an affiliation during the two years period preceding the date of
appointment;
    
    A business or professional relationship shall not be deemed as an affiliation if all
of the following conditions are met: (i) the relationship is negligible for both the
person who is the nominee to be appointed as an external director and the company; (ii)
the relationship commenced prior to such persons appointment; (iii) the audit
committee resolved, prior to the appointment, based on facts presented to it, that the
condition detailed in clause (i) is fulfilled; and (iv) the existence of a business or
professional relationship and the approval of the audit committee were brought to the
attention of the shareholders meeting prior to the approval of the appointment.
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Election of External Directors
  
    
    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.
   Audit Committee
 Nasdaq Requirements
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Companies Law Requirements
  
    
    the chairman of the board of directors;
    
    any controlling shareholder or any relative of a controlling shareholder; and
    
    any director employed by the company or who provides services to the company on a
regular basis.
   Approval of Certain Transactions
   71




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Remuneration of Directors
 .
 72




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.
  Option Committee
  Dividends
  Internal Auditor
  Fiduciary Duties of Office Holders
  73




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
    
    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.
  
    
    refrain from any conflict of interest between the performance of his or her duties
in the company and any other of his or her other duties or his or her personal
affairs;
    
    refrain from any activity that is competitive with the company;
    
    refrain from exploiting any business opportunity of the company to receive a
personal gain for himself or herself or others; and
    
    disclose to the company any information or documents relating to a companys affairs
which the office holder has received due to his or her position as an office holder.
 Approval of Specified Related Party Transactions under Israeli Law
   
    
    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.
  Disclosure of Personal Interests of an Office Holder
  
    
    the office holders spouse, siblings, parents, grandparents, descendants, spouses
descendants and the spouses of any of these people; or
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
    
    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.
  
    
    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.
    Disclosure of Personal Interests of a Controlling Shareholder
   
    
    at least one-third of the shares of shareholders who have no personal interest in
the transaction and who are present and voting (in person or by proxy or written
ballot), vote in favor; or
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
    
    shareholders who have no personal interest in the transaction who vote against the
transaction do not represent more than one percent of the aggregate voting rights in
the company.
    76




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Exculpation, Insurance and Indemnification of Directors and Officers
  Office Holders Insurance
  
    
    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
  
    
    a financial liability imposed on him or her in favor of another person by any
judgment, including a settlement or an arbitration award approved by a court. Such
indemnification may be approved (i) after the liability has been incurred or (ii) in
advance, provided that our undertaking to indemnify is limited to events that our board
of directors believes are foreseeable in light of our actual operations at the time of
providing the undertaking and to a sum or criterion that our board of directors
determines to be reasonable under the circumstances, provided, that such event, sum or
criterion shall be detailed in the undertaking;
    
    reasonable litigation expenses, including attorneys fees, expended by the office
holder as a result of an investigation or proceeding instituted against him by a
competent authority, provided that such investigation or proceeding concluded without
the filing of an indictment against him and either (i) concluded without the imposition
of any financial liability in lieu of criminal proceedings or (ii) concluded with the
imposition of a financial liability in lieu of criminal proceedings but relates to a
criminal offense that does not require proof of criminal intent; and
 77




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##### Table of Contents




    
    reasonable litigation expenses, including attorneys fees, expended by the office
holder or charged to him or her by a court, resulting from the following: proceedings
we institute against him or her or instituted on our behalf or by another person; a
criminal indictment from which he or she was acquitted; or a criminal indictment in
which he or she was convicted for a criminal offense that does not require proof of
intent.
 Limitations on Insurance and Indemnification
  
    
    a breach by the office holder of his or her duty of loyalty, except that the company
may enter into an insurance contract or indemnify an office holder if the office holder
acted in good faith and had a reasonable basis to believe that the act would not
prejudice the company;
    
    a breach by the office holder of his or her duty of care if the breach was done
intentionally or recklessly, unless it was committed only negligently;
    
    any act or omission done with the intent to derive an illegal personal benefit; or
    
    any fine levied against the office holder.
  th th th
 Mergers and Acquisitions under Israeli Law
  78




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##### Table of Contents



Special Tender Offer.
 79




---



##### Table of Contents



Full Tender Offer.
 Regular Tender Offer
   80




---



##### Table of Contents



Employees
       81




---



##### Table of Contents



Share Ownership
  Percentage of
    
    
    
    
    
    Range ofOutstanding
    
    Number of
    
    Exercise PricesNumber of
    
    Ordinary
    
    Share Options
    
    per Share ofName
    
    Ordinary Shares
    
    Shares
    
    Held(1)
    
    Share OptionsZohar Zisapel
    
    
    3,080,220
    
    
    
    11.1
    
    
    
    340,000
    
    
    $
    2.00-$11.75Ira Palti
    
    
    0
    
    
    
    0
    
    
    
    800,000
    
    
    $
    4.49-$5.47All directors and
senior management
as a group,
consisting of 12
people
(2)
    
    
    3,085,072
    
    
    
    11.1
    
    
    
    2,652,400
    
    
    $
    1.15-$13.00
 
 (1)
    
    Each share option is exercisable into one ordinary share, and expires 10 years from the date
of its grant.(2)
    
    Each of the directors and senior managers other than Messrs. Zohar Zisapel and Ira Palti
beneficially owns less than 1% of the outstanding ordinary shares as of March 31, 2007
(including options held by each such person and which are vested or shall become vested within
60 days of March 31, 2007) and have therefore not been separately disclosed. Share Option Plans
 1996 Key Employee Share Incentive Plan
  82




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##### Table of Contents



Ordinary shares reserved
    
    
    
    Weighted averagefor option grants
    
    Options outstanding
    
    exercise price588,650
    
    588,650
    
    $ 6.38
 Affiliate Employees Option Plan
  Ordinary shares reserved
    
    
    
    
    
    Weighted averagefor option grants
    
    Options outstanding
    
    exercise price656,001
    
    
    656,001
    
    
    $  4.76
  The 2003 Share Option Plan
  83




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##### Table of Contents



Cumulative Ordinary
    
    Remaining ReservedShares Reserved for
    
    Shares Available for
    
    Options
    
    Weighted AverageOption Grants
    
    Options Grants
    
    Outstanding
    
    Exercise Price11,728,537
    
    
    154,313
    
    
    
    4,041,533
    
    
    $ 4.76
  Options outstanding
    
    Unvested OptionsDirectors and senior management
    
    
    1,746,875
    
    
    
    1,161,125All other grantees
    
    
    3,539,309
    
    
    
    1,368,674
 Amendment
  
 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
 Major Shareholders
   84




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##### Table of Contents



Percentage ofNumber of
    
    OutstandingName
    
    Ordinary Shares
    
    Ordinary Shares1Zohar Zisapel (2)
    
    
    3,420,220
    
    
    
    12.1
    %Yehuda Zisapel (2)
    
    
    2,838,000
    
    
    
    10.2
    %HarbourVest International
Private Equity Partners
III  Direct Fund,
L.P.(3)
    
    
    1,409,175
    
    
    
    5.1
    %
 
 (1)
    
    Based on 27,851,229 ordinary shares issued and outstanding as of March 31, 2007.(2)
    
    Yehuda Zisapel and Zohar Zisapel are brothers.(3)
    
    The sole general partner of HarbourVest International Private Equity Partners III-Direct
Fund, L.P. is HIPEP III-Direct Associates L.L.C., the managing member of which is HarbourVest
Partners, LLC. The address of HarbourVest is One Financial Center, Boston, Massachusetts
02111, U.S.A. The members of HIPEP III Direct Associates L.L.C. and HarbourVest Partners LLC
may be deemed to have an indirect pecuniary interest (within the meaning of Rule 16a-1 under
the Exchange Act) in an indeterminate portion of the shares beneficially owned by HarbourVest
International Private Equity Partners III-Direct Fund, L.P. Such members disclaim beneficial
ownership of these shares within the meaning of Rule 13d-3 of the Exchange Act.  Related Party Transactions
 The RAD-BYNET Group of Companies
  85




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##### Table of Contents



AB-NET Communications Ltd.
    
    Packetlight Networks Ltd.
    
    RADVision Ltd.BYNET Data Communications Ltd.
    
    RAD-Bynet Properties and Services (1981) Ltd.
    
    RADWARE Ltd.BYNET Electronics Ltd
    
    RADCOM Ltd.
    
    RADWIN Ltd.BYNET SEMECH (Outsourcing) Ltd.
    
    RAD Data Communications Ltd. and its
subsidiaries
    
    RIT Technologies Ltd.BYNET Systems Applications Ltd.
    
    RADLive Ltd.
    
    SANRAD Inc.Channellot Ltd.
    
    
    
    SILICOM Ltd.Commex Technologies Inc.
    
    
    
    WISAIR Inc.
      Lease Arrangements
 86




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##### Table of Contents



Supply Arrangement
  Registration Rights
  
    
    the majority of the holders of the ordinary shares resulting from the conversion of such
preferred shares; and
    
    Yehuda Zisapel and Zohar Zisapel.
  
 ITEM 8. FINANCIAL INFORMATION
 Consolidated Statements and Other Financial Information
  Export Sales
  87




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##### Table of Contents



Legal Proceedings
  Dividends
  No Significant Changes
  88




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##### Table of Contents



ITEM 9. THE OFFER AND LISTING
 Offer and Listing Details
   Ordinary SharesHigh
    
    Low2002 (Annual)
    
    $
    4.80
    
    
    $
    0.882003 (Annual)
    
    
    7.55
    
    
    
    1.002004 (Annual)
    
    
    8.74
    
    
    
    3.702005 (Annual)
    
    
    6.77
    
    
    
    3.402006 (Annual)
    
    
    5.74
    
    
    
    3.872005First Quarter
    
    
    6.77
    
    
    
    4.76Second Quarter
    
    
    5.46
    
    
    
    4.10Third Quarter
    
    
    5.12
    
    
    
    4.30Fourth Quarter
    
    
    4.80
    
    
    
    3.402006First Quarter
    
    
    5.19
    
    
    
    3.87Second Quarter
    
    
    5.59
    
    
    
    4.10Third Quarter
    
    
    4.72
    
    
    
    3.96Fourth Quarter
    
    
    5.74
    
    
    
    4.202007First Quarter
    
    
    6.33
    
    
    
    5.11Second Quarter (through May 31)
    
    
    9.64
    
    
    
    5.55
  Ordinary SharesHigh
    
    LowDecember 2006
    
    $
    5.55
    
    
    $
    4.97January 2007
    
    
    6.33
    
    
    
    5.30February 2007
    
    
    6.27
    
    
    
    5.28March 2007
    
    
    5.77
    
    
    
    5.11April 2007
    
    
    7.19
    
    
    
    5.55May 2007
    
    
    9.64
    
    
    
    6.72
 89




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##### Table of Contents



High
    
    Low2004 (4 months)
    
    $
    6.36
    
    
    $
    4.352005 (Annual)
    
    
    6.67
    
    
    
    3.462006 (Annual)
    
    
    5.70
    
    
    
    3.792005First Quarter
    
    
    6.69
    
    
    
    4.86Second Quarter
    
    
    5.26
    
    
    
    4.27Third Quarter
    
    
    5.07
    
    
    
    4.29Fourth Quarter
    
    
    4.79
    
    
    
    3.432006First Quarter
    
    
    5.08
    
    
    
    3.72Second Quarter
    
    
    5.80
    
    
    
    4.18Third Quarter
    
    
    5.03
    
    
    
    3.71Fourth Quarter
    
    
    5.75
    
    
    
    4.192007First Quarter
    
    
    6.35
    
    
    
    5.12Second Quarter (through May 31)
    
    
    9.24
    
    
    
    5.56
  High
    
    LowDecember 2006
    
    $
    5.45
    
    
    $
    4.94January 2007
    
    
    6.31
    
    
    
    5.33February 2007
    
    
    6.35
    
    
    
    5.26March 2007
    
    
    5.61
    
    
    
    5.12April 2007
    
    
    6.81
    
    
    
    5.56May 2007
    
    
    9.24
    
    
    
    6.72
 Markets
  
 ITEM 10. ADDITIONAL INFORMATION
 90




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##### Table of Contents



Memorandum and Articles of Association
  Material Contracts
  Exchange Controls
   Taxation
   Israeli Capital Gains Tax on Sales of Shares
  91




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##### Table of Contents




    
    holds the ordinary shares as a capital asset; and
    
    qualifies as a resident of the United States within the meaning of the U.S.-Israel
tax treaty; and
    
    is entitled to claim the benefits available to the person by the U.S.-Israel tax
treaty.
  92




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##### Table of Contents



Israeli Taxation of Dividends Distributed to Non-Resident Holders of Our Shares
  Dividends not generated by an approved enterprise (or Benefited Enterprise)U.S. company holding 10% or more of ourissued voting power during the part of the taxDividends generated by
    
    year which precedes the date of payment of thean approved enterprise
    
    dividend and during the whole of its prior tax(or Benefited Enterprise)
    
    year
    
    Other non-resident15%
    
    
    12.5
    %
    
    20%-25%
 U.S. Federal Income Tax Considerations
  
    
    an individual citizen or resident of the United States;
    
    a corporation (or other entity taxable as a corporation for U.S. federal income tax
purposes) created or organized in the United States or under the laws of the United
States, any political subdivision thereof or the District of Columbia;
    
    an estate, the income of which is subject to U.S. federal income tax regardless of
its source; or
 93




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##### Table of Contents




    
    a trust if (i) a court within the United States is able to exercise primary
supervision over its administration and one or more U.S. persons have the authority to
control all of its substantial decisions or (ii) that has in effect a valid election
under applicable U.S. Treasury Regulations to be treated as a U.S. person.
    
    
    are broker-dealers or insurance companies;
    
    have elected mark-to-market accounting;
    
    are tax-exempt organizations or retirement plans;
    
    are grantor trusts;
    
    are certain former citizens or long-term residents of the United States;
    
    are financial institutions or financial services entities;
    
    hold ordinary shares as part of a straddle, hedge or conversion transaction with
other investments;
    
    acquired their ordinary shares upon the exercise of employee share options or
otherwise as compensation;
    
    are real estate investment trusts or regulated investment companies;
    
    own directly, indirectly or by attribution at least 10% of our voting power; or
    
    have a functional currency that is not the U.S. dollar.
 94




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##### Table of Contents



Taxation of Distributions Paid on Ordinary Shares
   95




---



##### Table of Contents



Taxation of the Disposition of Ordinary Shares
  96




---



##### Table of Contents



Tax Consequences if We Are a Passive Foreign Investment Company
    97




---



##### Table of Contents



98




---



##### Table of Contents



The U.S. federal income tax consequences to a U.S. holder if we were to be classified as a
PFIC in 2006 or any previous taxable year are complex. A U.S. holder should consult with his or her
own advisor with regard to those consequences, as well as with regard to whether he or she should
make either of the elections described above.
 Tax Consequences for Non-U.S. Holders of Ordinary Shares
  
    
    the item is effectively connected with the conduct by the Non-U.S. holder of a trade
or business in the United States and in the case of a resident of a country which has a
treaty with the United States, the item is attributable to a permanent establishment,
or in the case of an individual, the item is attributable to a fixed place of business
in the United States; or
 99




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##### Table of Contents




    
    the Non-U.S. holder is an individual who holds the ordinary shares as a capital
asset and is present in the United States for 183 days or more in the taxable year of
the disposition and certain other conditions are met.
 Information Reporting and Back-up Withholding
   Documents on Display
    
 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  100




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##### Table of Contents




   
 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.
  
 PART II
 
 ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.
  
 ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS.
 Amendment to Articles
 101




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##### Table of Contents




    
    Article 39 was amended by adding new subsection (f) to allow the term of a director
(external or otherwise) to commence following the election of such director by
shareholder resolution;
    
    Articles 20 (record date for general meetings), 25 (notice of general meetings), 33
(form of proxy), 34 (effect of death of appointor) and 69 (notices) were amended to
take into account new regulations promulgated under the Israeli Companies Law
concerning notice of general meetings and shareholder proxies and to simplify the
Companys compliance with them;
    
    Articles 39(d) (election of directors), 43 (remuneration of directors) and 52
(deletion of requirement that shareholders approve the final dividend) were amended to
take account of changes in the Israeli Companies Law and to make other minor
corrections and changes associated therewith.
  Use of Proceeds
  
 ITEM 15. CONTROLS AND PROCEDURES
   102




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##### Table of Contents



ITEM 16. [RESERVED]
 
 ITEM16A. AUDIT COMMITTEE FINANCIAL EXPERT
 103




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##### Table of Contents



ITEM 16B. CODE OF ETHICS
  
 ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
 Fees Paid to Independent Auditors
  Year Ended December 31,2005
    
    
    2006Services Rendered
    
    Fees
    
    
    Percentages
    
    
    Fees
    
    
    PercentagesAudit (1)
    
    $
    75,000
    
    
    
    68
    
    
    $
    75,235
    
    
    
    78Audit-related (2)
    
    
    20,000
    
    
    
    18
    
    
    
    11,780
    
    
    
    12Tax (3)
    
    
    15,000
    
    
    
    14
    
    
    
    10,000
    
    
    
    10$
    110,000
    
    
    
    100
    
    
    $
    97,015
    
    
    
    100
 
 (1)
    
    Audit fees consist of services that would normally be provided in connection with statutory
and regulatory filings or engagements, including services that generally only the independent
accountant can reasonably provide.(2)
    
    Audit-related fees relate to assurance and associated services that traditionally are
performed by the independent auditor, including: accounting consultation and consultation
concerning financial accounting and reporting standards.(3)
    
    Tax fees relate to tax compliance, planning and advice. Policies and Procedures
  
 ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
 104




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##### Table of Contents



ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
  105




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##### Table of Contents



PART III
 
 ITEM 17. FINANCIAL STATEMENTS
  
 ITEM 18. FINANCIAL STATEMENTS
  Index to Consolidated Financial Statements
    
    PAGEReport of Independent Registered Public Accounting Firm
    
    
    F-2Consolidated Balance Sheets at December 31, 2006 and 2005
    
    
    F-3Consolidated Statements of Operations for the Years Ended
December 31, 2006, 2005 and 2004
    
    
    F-5Statements of Changes in Shareholders Equity for the Years Ended
December 31, 2006, 2005 and 2004
    
    
    F-6Consolidated Statements of Cash Flows for the Years Ended December 31, 2006,
2005 and 2004
    
    
    F-7Notes to Consolidated Financial Statements
    
    
    F-8
 
 ITEM 19. EXHIBITS
 1.1
    
    Memorandum of Association (English translation accompanied by Hebrew
original)*1.2
    
    Articles of Association, as amended November 23, 2006*4.1
    
    Tenancy Agreement, dated as of February 22, 2000, by and among the
Company, Zisapel Properties Ltd. and Klil & Michael Properties Ltd.
(English translation)*8.1
    
    List of Subsidiaries*10.1
    
    Consent of Independent Registered Public Accounting Firm*12.1
    
    Certification by Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 200212.2
    
    Certification by Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 200213.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
 
 *
    
    Previously filed. 106




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##### Table of Contents

'

SIGNATURE
   By: /s/ Ira Palti

Ira PaltiPresident and Chief Executive OfficerDate:
October 26, 2007
 107




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##### Table of Contents



CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
 CONSOLIDATED FINANCIAL STATEMENTS
 AS OF DECEMBER 31, 2006
 IN U.S. DOLLARS
 INDEX
 PageReport of Independent Registered Public Accounting Firm
    
    F-2Consolidated Balance Sheets
    
    F-3 - F-4Consolidated Statements of Operations
    
    F-5Statements of Changes in Shareholders Equity
    
    F-6Consolidated Statements of Cash Flows
    
    F-7Notes to Consolidated Financial Statements
    
    F-8 - F-30
   F-1




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 To the Shareholders of
 CERAGON NETWORKS LTD.
     Tel-Aviv, Israel
    
    KOST FORER GABBAY & KASIERERJune 27, 2007
    
    A Member of Ernst & Young Global
 F-2




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##### Table of Contents



CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 U.S. dollars in thousands
 December 31,Note
    
    
    2005
    
    
    2006ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    
    
    
    
    $
    10,315
    
    
    $
    10,170Short-term bank deposits
    
    
    
    
    
    
    3,917
    
    
    
    5,364Short-term marketable securities
    
    
    3
    
    
    
    5,654
    
    
    
    6,578Trade receivables (net of
allowance for doubtful accounts
of $518 and $842 at December 31,
2005 and 2006, respectively)
    
    
    
    
    
    
    15,079
    
    
    
    27,433Other accounts receivable and
prepaid expenses
    
    
    4
    
    
    
    5,141
    
    
    
    6,925Inventories
    
    
    5
    
    
    
    16,144
    
    
    
    27,311Total current assets
    
    
    
    
    
    
    56,250
    
    
    
    83,781LONG-TERM ASSETS:Long-term bank deposits
    
    
    
    
    
    
    5,322
    
    
    
    2,873Long-term marketable securities
    
    
    3
    
    
    
    7,814
    
    
    
    4,500Severance pay fund
    
    
    
    
    
    
    2,142
    
    
    
    2,537Total long-term assets
    
    
    
    
    
    
    15,278
    
    
    
    9,910PROPERTY AND EQUIPMENT, NET
    
    
    6
    
    
    
    2,464
    
    
    
    2,660Total assets
    
    
    
    
    
    $
    73,992
    
    
    $
    96,351
  F-3




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##### Table of Contents



CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
 CONSOLIDATED BALANCE SHEETS
 U.S. dollars in thousands (except share and per share data)
 December 31,Note
    
    
    2005
    
    
    2006LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Trade payables
    
    
    
    
    
    $
    12,382
    
    
    $
    22,147Deferred revenues
    
    
    
    
    
    
    3,456
    
    
    
    3,739Other accounts payable and accrued expenses
    
    
    7
    
    
    
    5,541
    
    
    
    10,627Total current liabilities
    
    
    
    
    
    
    21,379
    
    
    
    36,513LONG TERM LIABILITIESAccrued severance pay
    
    
    
    
    
    
    3,424
    
    
    
    4,352Other payables
    
    
    8a
    
    
    
    
    
    
    
    7,925Total long-term liabilities
    
    
    
    
    
    
    3,424
    
    
    
    12,277COMITMENTS AND CONTINGENT LIABILITIES
    
    
    8SHAREHOLDERS EQUITY:
    
    
    9Share capital -Ordinary shares of NIS 0.01 par value -
Authorized: 40,000,000 shares at December
31, 2005 and 2006; Issued and
outstanding: 26,335,003 and 27,436,090
shares at December
31, 2005 and 2006, respectively
    
    
    
    
    
    
    65
    
    
    
    68Additional paid-in capital
    
    
    
    
    
    
    177,338
    
    
    
    181,128Deferred
share compensation
    
    
    
    
    
    
    (26
    )
    
    
    Accumulated other comprehensive income
    
    
    
    
    
    
    51
    
    
    
    64Accumulated deficit
    
    
    
    
    
    
    (128,239
    )
    
    
    (133,699
    )Total shareholders equity
    
    
    
    
    
    
    49,189
    
    
    
    47,561Total liabilities and shareholders equity
    
    
    
    
    
    $
    73,992
    
    
    $
    96,351
  June 27, 2007
    
    /s/ Naftali Idan
    
    /s/ Ira PaltiDate of approval of the financial 
statements
    
    Naftali Idan
Executive Vice President and
Chief Financial Officer
    
    Ira Palti
President and Chief Executive
Officer
 F-4




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##### Table of Contents



CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
 
 CONSOLIDATED STATEMENT OF OPERATIONS
 U.S. dollars in thousands (except per share data)
 Year ended December 31,Note
    
    
    2004
    
    
    2005
    
    
    2006Revenues
    
    
    11a
    
    
    $
    54,831
    
    
    $
    73,777
    
    
    $
    108,415Cost of revenues
    
    
    
    
    
    
    32,227
    
    
    
    52,487
    
    
    
    80,776Gross Profit
    
    
    
    
    
    
    22,604
    
    
    
    21,290
    
    
    
    27,639Operating expenses:Research and development
    
    
    
    
    
    
    9,772
    
    
    
    10,713
    
    
    
    13,336Less  grants and participations
    
    
    
    
    
    
    2,293
    
    
    
    1,752
    
    
    
    1,543Research and development, net
    
    
    
    
    
    
    7,479
    
    
    
    8,961
    
    
    
    11,793Selling and marketing
    
    
    
    
    
    
    11,841
    
    
    
    13,629
    
    
    
    17,420General and administrative
    
    
    
    
    
    
    2,485
    
    
    
    3,200
    
    
    
    5,217Total operating expenses
    
    
    
    
    
    
    21,805
    
    
    
    25,790
    
    
    
    34,430Operating income (loss)
    
    
    
    
    
    
    799
    
    
    
    (4,500
    )
    
    
    (6,791
    )Financial income, net
    
    
    11b
    
    
    
    674
    
    
    
    607
    
    
    
    1,284Other income
    
    
    
    
    
    
    141
    
    
    
    66
    
    
    
    47Net income (loss)
    
    
    
    
    
    $
    1,614
    
    
    $
    (3,827
    )
    
    $
    (5,460
    )Net earnings (loss) per share:Basic and diluted net earnings
(loss) per Ordinary share
    
    
    11c
    
    
    $
    0.06
    
    
    $
    (0.15
    )
    
    $
    (0.20
    )
  F-5




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##### Table of Contents



CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
 
 STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
 U.S. dollars in thousands (except share and per share data)
 AccumulatedAdditional
    
    
    Deferred
    
    
    other
    
    
    
    
    
    
    Total other
    
    
    TotalOrdinary
    
    
    Share
    
    
    paid-in
    
    
    share
    
    
    comprehensive
    
    
    Accumulated
    
    
    comprehensives
    
    
    shareholdersshares
    
    
    capital
    
    
    capital
    
    
    compensation
    
    
    income
    
    
    Deficit
    
    
    income (loss)
    
    
    equityBalance as of January 1,
2004
    
    
    24,675,313
    
    
    $
    61
    
    
    $
    175,043
    
    
    $
    (395
    )
    
    $
    
    
    
    $
    (126,026
    )
    
    
    
    
    
    $
    48,683Exercise of
share options
    
    
    1,178,108
    
    
    
    3
    
    
    
    1,451
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,454Deferred share
compensation
    
    
    
    
    
    
    
    
    
    
    60
    
    
    
    (60
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Reversal of deferred shareCompensation
Related to forfeited options
    
    
    
    
    
    
    
    
    
    
    (8
    )
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of deferred
share compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    374
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    374Comprehensive income:Income tax benefit derived
from exercise
of employee share options*)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    
    Unrealized gain from
hedging activities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    62
    
    
    
    
    
    
    
    62
    
    
    
    62Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,614
    
    
    
    1,614
    
    
    
    1,614Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,676Balance as of December 31,
2004
    
    
    25,853,421
    
    
    
    64
    
    
    
    176,546
    
    
    
    (73
    )
    
    
    62
    
    
    
    (124,412
    )
    
    
    
    
    
    
    52,187Exercise of share options
    
    
    481,582
    
    
    
    1
    
    
    
    677
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    678Amortization of share
compensation related to
accelerated options
    
    
    
    
    
    
    
    
    
    
    115
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    115Amortization of deferred
share compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    47Comprehensive loss:Income tax benefit
derived from exercise of
employee share options*)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    
    Unrealized loss from
hedging activities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11
    )
    
    
    
    
    
    
    (11
    )
    
    
    (11
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,827
    )
    
    
    (3,827
    )
    
    
    (3,827
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (3,838
    )Balance as of December 31,
2005
    
    
    26,335,003
    
    
    
    65
    
    
    
    177,338
    
    
    
    (26
    )
    
    
    51
    
    
    
    (128,239
    )
    
    
    
    
    
    
    49,189Exercise of share options
    
    
    1,101.087
    
    
    
    3
    
    
    
    2,104
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,107Reversal of deferred
share compensation upon
adoption of SFAS 123(R)
    
    
    
    
    
    
    
    
    
    
    (26
    )
    
    
    26
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Share-based compensation
expense
    
    
    
    
    
    
    
    
    
    
    1,712
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,712Comprehensive loss:Income tax benefit derived
from exercise of employee
share options *)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    
    
    
    
    Unrealized loss from
hedging activities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13
    
    
    
    
    
    
    
    13
    
    
    
    13Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,460
    )
    
    
    (5,460
    )
    
    
    (5,460
    )$
    (5,447
    )Balance as of December 31,
2006
    
    
    27,436,090
    
    
    $
    68
    
    
    $
    181,128
    
    
    $
    
    
    
    $
    64
    
    
    $
    (133,699
    )
    
    
    
    
    
    $
    47,561
 
 *)
    
    The income tax benefit for the years ended December 31, 2004, 2005 and 2006 was $1,784, $168
and $524, respectively, for which a full valuation allowance was provided (see also Note 10e).  F-6




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##### Table of Contents



CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 U.S. dollars in thousands
 Year ended December 31,2004
    
    
    2005
    
    
    2006Cash flows from operating activities:Net income (loss)Adjustments required to reconcile net income (loss) to net cash
used in operating activities:
    
    $
    1,614
    
    
    $
    (3,827
    )
    
    $
    (5,460
    )Depreciation
    
    
    833
    
    
    
    972
    
    
    
    1,194Share-based compensation expense
    
    
    374
    
    
    
    162
    
    
    
    1,712Gain from sale of property and equipment
    
    
    (4
    )
    
    
    (2
    )
    
    
    (45
    )Accrued severance pay, net
    
    
    252
    
    
    
    243
    
    
    
    533Decrease (increase) in accrued interest on bank deposits
    
    
    20
    
    
    
    (42
    )
    
    
    (89
    )Interest accrued and amortization of premium on
held-to-maturity marketable securities
    
    
    298
    
    
    
    269
    
    
    
    37Increase in trade receivables, net
    
    
    (1,883
    )
    
    
    (8,140
    )
    
    
    (12,354
    )Increase in other accounts receivable and prepaid expenses
    
    
    (1,631
    )
    
    
    (717
    )
    
    
    (1,771
    )Decrease (increase) in inventories
    
    
    (7,980
    )
    
    
    2,939
    
    
    
    (11,167
    )Decrease (increase) in long-term receivables
    
    
    (240
    )
    
    
    390
    
    
    
    Increase in trade payables
    
    
    3,686
    
    
    
    3,034
    
    
    
    9,765Increase in deferred revenues
    
    
    1,256
    
    
    
    342
    
    
    
    283Increase in other accounts payable and accrued expenses
    
    
    1,702
    
    
    
    65
    
    
    
    5,086Increase in other long-term payables
    
    
    
    
    
    
    
    
    
    
    7,925Net cash used in operating activities
    
    
    (1,703
    )
    
    
    (4,312
    )
    
    
    (4,351
    )Cash flows from investing activities:Purchase or property and equipment
    
    
    (711
    )
    
    
    (938
    )
    
    
    (1,393
    )Proceeds from sale of property and equipment
    
    
    33
    
    
    
    20
    
    
    
    48Short-term bank deposits, net
    
    
    6,998
    
    
    
    2,563
    
    
    
    (1,424
    )Investment in long-term bank deposits
    
    
    (3,413
    )
    
    
    (3,336
    )
    
    
    2,515Investment in held-to-maturity marketable securities
    
    
    (9,420
    )
    
    
    (4,770
    )
    
    
    (3,116
    )Proceeds from maturities of held-to-maturity marketable securities
    
    
    10,689
    
    
    
    9,176
    
    
    
    5,469Net cash provided by investing activities
    
    
    4,176
    
    
    
    2,715
    
    
    
    2,099Cash flows from financing activities:Proceeds from exercise of share options
    
    
    1,454
    
    
    
    678
    
    
    
    2,107Net cash provided by financing activities
    
    
    1,454
    
    
    
    678
    
    
    
    2,107Increase (decrease) in cash and cash equivalents
    
    
    3,927
    
    
    
    (919
    )
    
    
    (145
    )Cash and cash equivalents at the beginning of the year
    
    
    7,307
    
    
    
    11,234
    
    
    
    10,315Cash and cash equivalents at the end of the year
    
    $
    11,234
    
    
    $
    10,315
    
    
    $
    10,170
  F-7




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##### Table of Contents



CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands (except share and per share data)
 NOTE 1:  GENERAL
    NOTE 2:  SIGNIFICANT ACCOUNTING POLICIES
 a.
    
    Basis of presentation:The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the U.S. (U.S. GAAP).b.
    
    Use of estimates:The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.c.
    
    Financial statements in U.S. dollars:A majority of the revenues of the Company and certain of its subsidiaries are
generated in U.S. dollars (dollars). In addition, a substantial portion of the
Companys and certain of its subsidiaries costs is incurred in dollars. Since
management believes that the dollar is the currency of the primary economic
environment in which the Company and certain of its subsidiaries operate, the dollar
is their functional and reporting currency. Accordingly, amounts in currencies other
than U.S dollars have been remeasured in accordance with Statement 52 of the
Financial Accounting Standards Board (FASB), Foreign Currency Translation as
follows:Monetary balances  at the exchange rate in effect on the balance sheet date.Costs  at the exchange rates in effect as of the date of recognition of the
transaction.
 F-8




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##### Table of Contents



CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands (except share and per share data)
 
 All exchange gains and losses from the remeasurement mentioned above are reflected
in the statement of operations in financial income, net.Management considers the non-U.S. subsidiaries to be a direct, integral extension of
the parent companys operations. Accordingly, the functional currency of these
subsidiaries is the dollar.d.
    
    Principles of consolidation:The consolidated financial statements include the accounts of the Company and its
subsidiaries (the Group). Intercompany balances and transactions including profits
from intercompany sales not yet realized outside the Group, have been eliminated
upon consolidation.e.
    
    Cash equivalents:Cash equivalents include short-term, highly liquid investments that are readily
convertible to cash with original maturities of three months or less.f.
    
    Short-term and long-term bank deposits:Short-term bank deposits are deposits with maturities of more than three months and
up to one year. The short-term bank deposits are in U.S. dollars and bear interest
at an average rate of 4.25%. The short-term bank deposits are presented at their
cost, including accrued interest.Long-term bank deposits are deposits with maturities of more than one year. The
long-term deposits are in U.S. dollars and bear interest at an average rate of
4.30%. The long-term bank deposits are presented at their cost, including accrued
interest.g.
    
    Marketable securities:The Company accounts for investments in marketable securities in accordance with
SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities
(SFAS 115).Management determines the appropriate classification of its investments in
marketable debt securities at the time of purchase and reevaluates such
determinations at each balance sheet date. Marketable securities are classified as
held-to-maturity as the Company has the positive intent and ability to hold the
securities to maturity. Such marketable securities are stated at amortized cost plus
accrued interest.
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##### Table of Contents



CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands (except share and per share data)
 
 During the years ended December 31, 2005 and 2006, all securities covered by SFAS
115 were designated by the Companys management as held-to-maturity.Amortization of premium and accretion of discounts, as well as interest and
impairment of value judged to be other than temporary, are included in financial
income, net.h.
    
    Inventories:Inventories are stated at the lower of cost or market value.Cost is determined as follows:Raw materials  using the moving average cost method plus indirect costs. Work in
progress  using the moving average cost method plus indirect costs. Finished goods
 using the moving average cost method plus indirect costs.
 The Company periodically assesses its inventory and writes down the value of
inventory to cover risks arising from technological obsolescence or excess
inventory.i.
    
    Property and equipment:Property and equipment are stated at cost, net of accumulated depreciation.
Depreciation is calculated by the straight-line method over the estimated useful
lives of the assets, at the following annual rates:
 %Computers, manufacturing and peripheral equipment
    
    
    15 - 33Office furniture and equipment
    
    
    7Leasehold improvements
    
    By the shorter of the term of the lease or the life of the asset
 j.
    
    Impairment of long-lived assets:The Companys and its subsidiaries long-lived assets are reviewed for impairment in
accordance with Statement of Financial Accounting Standard No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets (SFAS 144), whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to the
 F-10




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##### Table of Contents



CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands (except share and per share data)
 future undiscounted cash flows expected to be generated by the asset. If an asset is
considered to be impaired, the impairment to be recognized is measured by the amount
by which the carrying amount of the asset exceeds its fair value. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell. During 2004, 2005 and 2006, no impairment losses have been
identified.k.
    
    Income taxes:The Company and its subsidiaries account for income taxes in accordance with
Statement of Financial Accounting Standard No. 109, Accounting for Income Taxes
(SFAS No. 109). This Statement prescribes the use of the liability method whereby
deferred tax asset and liability account balances are determined based on
differences between the financial reporting and tax bases of assets and liabilities
and for carryforward losses deferred taxes are measured using the enacted tax rates
and laws that will be in effect when the differences are expected to reverse. The
Company and its subsidiaries provide a valuation allowance, if necessary, to reduce
deferred tax assets to their estimated realizable value if it is more likely than
not that some portion or all of the deferred tax asset will not be realized.
 l.
    
    Revenue recognition:The Company and its subsidiaries generate their revenues from selling their products
to end users, distributors, system integrators and original equipment manufacturers
(OEM).Revenues from product sales are recognized in accordance with SEC Staff Accounting
Bulletin (SAB) No. 104, Revenue Recognition (SAB 104), when delivery has
occurred, persuasive evidence of an arrangement exists, the vendors fee is fixed or
determinable, no future obligation exists and collectibility is probable.The Company generally does not grant a right of return to its customers. When a
right of return exists, the Company creates a provision for returns according to
SFAS 48, Revenue Recognition When Right of Return Exists.When sale arrangements include a customer acceptance provision with respect to
products, revenue is not recognized before the Company has demonstrated that the
criteria specified in the acceptance provisions have been satisfied, or that the
acceptance provision has lapsed.
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##### Table of Contents



CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands (except share and per share data)
 
 Revenue from certain arrangements includes multiple elements which are the sale of
products and post delivery installation services that are not essential to the
functionality of the equipment, within a single contract. The Companys accounting
policy complies with the requirements set forth in Emerging Issues Task Force
(EITF) Issue No. 00-21, Revenue Arrangements with Multiple Deliverables (EITF
00-21), relating to the separation of multiple deliverables into individual
accounting units and revenue from such deliverables is recognized under SAB 104.In arrangements which include multiple elements, the Company considers the sale of
equipment and its installation to be two separate units of accounting in the
arrangement, since the installation is not essential to the functionality of the
equipment, the equipment has value to the customer on a standalone basis, and fair
value of the installation services exists. The Company defers the fair value of the
installation service (but not less than the amount contingent upon completion of
installation, if any) to the period in which such installation occurs.Fair value for installation of the Companys products is determined based on
available third-party evidence which is determined by using the price third-parties
charge the Company.The Company also applies Emerging Issues Task Force (EITF) 99-19, Reporting
Revenues Gross as a Principal versus Net as an Agent (EITF 99-19), regarding
arrangements where the Company also provides third party equipment and reports
revenues gross as a principal.Deferred revenues include amounts received from customers for which revenue has not
been recognized.m.
    
    Research and development costs:Research and development costs, net of grants received, are charged to the statement
of operations as incurred.
 n.
    
    Royalty-bearing grants:Royalty-bearing grants from the Government of Israel for funding approved research
and development projects are recognized at the time the Company is entitled to such
grants, on the basis of the costs incurred and included as a reduction in research
and development costs. Such grants are recorded as a
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##### Table of Contents



CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands (except share and per share data)
 
 reduction in research and development costs since when received it is not probable
that the grants will be repaid (see also Notes 7 and 8).o.
    
    Derivative instruments:The Company has instituted a foreign currency cash flow hedging program using
foreign currency forward and options (derivative instruments) in order to hedge
the exposure to variability in expected future cash flows resulting from changes in
related foreign currency exchange rates. These transactions are designated as cash
flow hedges, as defined by SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities(SFAS 133).SFAS 133 requires companies to recognize all of their derivative instruments as
either assets or liabilities in the statement of financial position at fair value.
The accounting for changes in the fair value (i.e., gains or losses) of a derivative
instrument depends on whether it has been designated and qualifies as part of a
hedging relationship and further, on the type of hedging relationship.For those derivative instruments that are designated and qualify as hedging
instruments, a company must designate the hedging instrument, based upon the
exposure being hedged, as a fair value hedge, cash flow hedge or a hedge of a net
investment in a foreign operation.For derivative instruments that are designated and qualify as a cash flow hedge
(i.e., hedging the exposure to variability in expected future cash flows that is
attributable to a particular risk), the effective portion of the gain or loss on the
derivative instrument is reported as a component of other comprehensive income
(loss) and reclassified into earnings in the same period or periods during which the
hedged transaction affects earnings.The Companys cash flow hedging strategy is to hedge against the risk of overall
changes in cash flows resulting from forecasted foreign currency salary payments
during the year. The Company hedges portions of its forecasted expenses denominated
in NIS with forward exchange contracts. These forward exchange contracts are
designated as cash flow hedges, as defined by SFAS No. 133 and Derivative
Implementation Group No. G20, Cash Flow Hedges: Assessing and Measuring the
Effectiveness of a Purchased option Used in a Cash Flow Hedge (DIG 20) and are
all effective.Fair value hedging strategy The Company enters into forward exchange contracts to
hedge a portion of its certain monetary items in the balance sheet, such as trade
receivables and trade payables denominated in foreign currencies for a period of up
to three months. The purpose of the Companys foreign currency hedging activities is
to protect the fair value due to foreign exchange rates.
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##### Table of Contents



CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands (except share and per share data)
 
 The Company recognized a gain (loss) from derivative instruments of $ 204, $ (28)
and $ (264) during the years ended December 31, 2004, 2005 and 2006, respectively,
which have been recorded in the statement of operations.The balance in accumulated other comprehensive income related to derivative
instruments as of December 31, 2006 is expected to be recognized in the statement of
operations over the next three months.p.
    
    Concentrations of credit risk:Financial instruments that potentially subject the Company and its subsidiaries to
concentrations of credit risk consist principally of cash and cash equivalents,
short-term and long-term bank deposits, marketable securities and trade receivables.
 The majority of the Companys cash and cash equivalents and short-term and long-term
bank deposits are invested in U.S. dollar instruments with major banks worldwide.
Such cash and cash equivalents and deposits in the United States may be in excess of
insured limits and are not insured in other jurisdictions. Management believes that
the financial institutions that hold the Companys investments are financially sound
and, accordingly, minimal credit risk exists with respect to these investments.The Companys trade receivables are derived from sales to customers located in North
America, Europe, the Middle East, Africa, Asia-Pacific and Latin America. The
Company and its subsidiaries generally do not require collateral; however, in
certain circumstances, the Company and its subsidiaries may require letters of
credit, additional guarantees or advance payments. The Company and its subsidiaries
perform ongoing credit evaluations of their customers and insure certain trade
receivables under credit insurance policies. An allowance for doubtful accounts is
determined with respect to a general reserve and specific receivables, of which the
collection may be doubtful.Changes in the Groups allowance for doubtful accounts are as follows:
 Allowance fordoubtfulaccountsBalance as of January 1, 2004
    
    $
    500Provision, net of recoveries
    
    
    75Write-off
    
    
    
 F-14




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##### Table of Contents



CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands (except share and per share data)
 Allowance fordoubtfulaccountsBalance as of December 31, 2004
    
    
    575Provision, net of recoveries
    
    
    295Write-off
    
    
    (352
    )Balance as of December 31, 2005
    
    
    518Provision, net of recoveries
    
    
    457Write-off
    
    
    (133
    )Balance as of December 31, 2006
    
    $
    842
   As of December 31, 2004 and 2005, the remaining balance of these sale transactions
was $ 6,677 and $ 265, respectively. These transactions included a recourse
provision (which did not violate the legal isolation and control criteria) and
represents an off-balance-sheet credit risk to the Company.q.
    
    Accounting for share-based compensation:On January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), Share-Based
Payment (SFAS No. 123(R)) which requires the measurement and recognition of
compensation expense based on estimated fair values for all share-based payment
awards made to employees and directors. SFAS No. 123(R) supersedes Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB
No. 25), for periods beginning in fiscal year 2006. In March 2005, the Securities
and Exchange Commission issued Staff Accounting
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CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands (except share and per share data)
 Bulletin No. 107 (SAB 107) relating to SFAS No. 123(R). The Company has applied
the provisions of SAB 107 in its adoption of SFAS No. 123(R).Effective January 1, 2006, the Company adopted SFAS No. 123(R) using the modified
prospective transition method. Under that transition method, compensation cost
recognized in the year ended December 31, 2006, includes: (a) compensation cost for
all share-based payments granted prior to, but not yet vested as of January 1, 2006,
based on the grant date fair value estimated in accordance with the original
provisions of SFAS No. 123, and (b) compensation cost for all share-based payments
granted subsequent to January 1, 2006, based on the grant-date fair value estimated
in accordance with the provisions of SFAS No. 123(R). Results for prior periods have
not been restated, in accordance with the modified prospective transition method.As a result of adopting SFAS No. 123(R) on January 1, 2006, the Companys net loss
for the year ended December 31, 2006, is $ 1,712 higher, than if it had continued to
account for share-based compensation under APB 25. Basic and diluted net loss per
share for the year ended December 31, 2006, are $ 0.06 higher, than if the Company
had continued to account for share based compensation under APB 25.SFAS No. 123(R) requires companies to estimate the fair value of equity-based
payment awards on the date of grant using an option-pricing model. The value of the
portion of the award that is ultimately expected to vest is recognized as an expense
over the requisite service periods in the Companys consolidated income statements.
Prior to the adoption of SFAS No. 123(R), the Company accounted for equity-based
awards to employees and directors using the intrinsic value method in accordance
with APB No. 25 as allowed under Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation (SFAS No. 123) and recognized
compensation expenses, over the requisite service period of each of the awards.
Forfeitures were accounted for as occurred.The pro-forma table below reflects the Companys share-based compensation expense,
net income (loss) and basic and diluted net earnings (loss) per share for the years
ended December 31, 2004 and 2005, had the Company applied fair value recognition
provision of SFAS 123, as follows:
 Year ended December 31,2004
    
    
    2005Net income (loss) as reported
    
    $
    1,614
    
    
    $
    (3,827
    )Add: share-based compensation expenses included in the
reported net income (loss) under APB 25
    
    
    374
    
    
    
    162
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CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands (except share and per share data)
 Year ended December 31,2004
    
    
    2005Deduct: share-based compensation expenses determined under
fair value based method for all awards
    
    
    (3,414
    )
    
    
    (1,884
    )Pro forma net loss
    
    $
    (1,426
    )
    
    $
    (5,549
    )Net earnings (loss) per shareBasic and diluted net loss per share  pro forma
    
    $
    (0.06
    )
    
    $
    (0.21
    )Basic and diluted net earnings (loss) per share- as reported
    
    $
    0.06
    
    
    $
    (0.15
    )
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CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands (except share and per share data)
   Year endedDecember 31,2006Cost of revenues
    
    $
    164Research and development, net
    
    
    310Selling and marketing
    
    
    471General and administrative
    
    
    767Total share-based compensation expenses
    
    $
    1,712Effect of
share-based compensation expenses, on basic and
diluted loss per Ordinary share
    
    $
    0.06
 r.
    
    Severance pay:The Companys severance pay liability for its Israeli employees is calculated
pursuant to Israels Severance Pay Law based on the most recent salary of the
employees multiplied by the number of years of employment, as of the balance sheet
date. Employees are entitled to one months salary for each year of employment or a
portion thereof. The Companys liability for all of its employees in Israel is fully
covered by monthly deposits with pension funds, insurance policies and an accrual.
The value of the funds deposited into pension funds and insurance policies is
recorded as an asset severance pay fund  in the Companys balance sheet.The severance pay fund includes the deposited funds and accumulated adjustments to
the Israeli Consumer Price Index up to the balance sheet date. The deposited funds
may be withdrawn only upon the fulfillment of the obligation pursuant to Israels
Severance Pay Law or labor agreements. The value of the deposited funds in insurance
policies, is based on the cash surrendered value of these policies, and includes
profits.Severance expense for the years ended December 31, 2004, 2005 and 2006, amounted to
approximately $ 771, $ 824 and $ 1,281, respectively.
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CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands (except share and per share data)
 
 s.
    
    Fair value of financial instruments:The following methods and assumptions were used by the Company and its subsidiaries
in estimating their fair value disclosures for financial instruments:The carrying amounts of cash and cash equivalents, short-term bank deposits, trade
receivables, other accounts receivable, trade payables and other accounts payable
approximate their fair values due to the short-term maturities of such instruments.
 The fair value of the Companys long-term bank deposits is estimated by discounting
the future cash flows using the current interest rates for long-term bank deposit of
similar terms and maturities. The carrying amount of the long-term bank deposit does
not significantly differ from its fair value.The fair value of marketable securities is based on quoted market prices and does
not differ significantly from the carrying amount.t.
    
    Comprehensive income (loss):The Company accounts for comprehensive income (loss) under the provisions of SFAS
No. 130, Reporting Comprehensive Income, which established standards for the
reporting and display of comprehensive income (loss) and its components.
Comprehensive income (loss) represents the change in shareholders equity during a
period from transactions and other events and circumstances from non-owner sources.
It includes all changes in equity except those resulting from investments by owners
and distributions to owners.u.
    
    Warranty costs:The Company generally offers a warranty period of 12 to 36 months for its products
and provides a standard limited warranty, including parts and labor. The Company
estimates the costs that may be incurred under its basic limited warranty and
records a liability in the amount of such costs at the time product revenue is
recognized. Factors that affect the Companys warranty liability include the number
of installed units, historical and anticipated rates of warranty claims, and cost
per claim. The Company periodically assesses the adequacy of its recorded warranty
liabilities and adjusts the amounts as necessary. Warranty expenses for the years
ended December 31, 2004, 2005 and 2006 were approximately $ 308, $ 267 and $ 352,
respectively.
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CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands (except share and per share data)
 
 v.
    
    Basic and diluted net earnings (loss) per share:Basic net earnings (loss) per share is computed based on the weighted average number
of Ordinary shares outstanding during each year. Diluted net earnings (loss) per
share is computed based on the weighted average number of Ordinary shares
outstanding during each year, plus dilutive potential Ordinary shares considered
outstanding during the year, in accordance with Statement of Financial Accounting
Standard No. 128, Earnings Per Share(SFAS 128).The total weighted average number of shares related to the outstanding options
excluded from the calculations of diluted net earnings (loss) per share due to their
anti-dilutive effect was 1,346,106, 4,514,433 and 3,364,631 for the years ended
December 31, 2004, 2005 and 2006, respectively.w.
    
    Reclassification:Certain amounts from prior year have been reclassified to conform to the current
years presentation.
 x.
    
    Impact of recently issued Accounting Standards:In June 2006, the FASB issued Interpretation 48, Accounting for Uncertainty in
Income Taxes (FIN 48), an interpretation of FASB Statement 109, Accounting for
Income Taxes. The Interpretation addresses the determination of whether tax
benefits claimed or expected to be claimed on a tax return should be recorded in the
financial statements. Under FIN 48, the Company may recognize the tax benefit from
an uncertain tax position only if it is more likely than not that the tax position
will be sustained on examination by the tax authorities, based on the technical
merits of the position. The tax benefits recognized in the financial statements from
such a position should be measured based on the largest benefit that has a greater
than fifty percent likelihood of being realized upon ultimate settlement.FIN 48 also provides guidance on de-recognition, classification, interest and
penalties on income taxes, accounting in interim periods and requires increased
disclosures. FIN 48 applies to all tax positions related to income taxes subject to
SFAS 109. This includes tax positions considered to be routine as well as those
with a high degree of uncertainty. FIN 48 specifically prohibits the use of a
valuation allowance as a substitute for de-recognition of tax positions. The
provisions of FIN 48 are effective beginning January 1, 2007. The Company is
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CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands (except share and per share data)
 currently assessing the impact that FIN 48 will have on its consolidated financial
statements.In September 2006, the SEC issued Staff Accounting Bulletin No. 108, Financial
Statements  Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements (SAB 108). SAB 108 requires
companies to quantify the impact of all correcting misstatements, including both the
carryover and reversing effects of prior year misstatements, on the current year
financial statements. SAB 108 is effective for fiscal years ending after November
15, 2006. The adoption of SAB 108 did not have any impact on the consolidated
financial statements.In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS
157, Fair Value Measurements (SFAS 157). This Standard defines fair value,
establishes a framework for measuring fair value in generally accepted accounting
principles and expands disclosures about fair value measurements. SFAS 157 is
effective for financial statements issued for fiscal years beginning after November
15, 2007 and interim periods within those fiscal years. The Company is currently
assessing the impact that SFAS 157 will have on its consolidated financial
statements.In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial
Assets and Financial Liabilities (SFAS 159). SFAS 159 permits companies to choose
to measure certain financial instruments and certain other items at fair value. The
Standard requires that unrealized gains gand losses on items for which the fair
value option has been elected be reported in earnings. SFAS 159 is effective for
financial statements issued for fiscal years beginning after November 15, 2007 and
interim periods within those fiscal years, although earlier adoption is permitted.
The Company is currently assessing the impact that SFAS 159 will have on its
consolidated financial statements.
 NOTE 3:  MARKETABLE SECURITIES
  December 31,2005
    
    2006Gross
    
    Gross
    
    Estimated
    
    
    
    
    
    Gross
    
    Gross
    
    EstimatedAmortized
    
    unrealized
    
    unrealized
    
    fair market
    
    Amortized
    
    unrealized
    
    unrealized
    
    fair marketcost
    
    gains
    
    losses
    
    value
    
    cost
    
    gains
    
    losses
    
    valueHeld-to-maturity:
    
    $
    9,252
    
    
    $
    
    
    
    $
    (189
    )
    
    $
    9,063
    
    
    $
    4,788
    
    
    $
    
    
    
    $
    400
    
    
    $
    5,188U.S. government and
agencies debts
    
    
    4,216
    
    
    
    
    
    
    
    (121
    )
    
    
    4,095
    
    
    
    6,290
    
    
    
    
    
    
    
    (642
    )
    
    
    5,648Corporate debentures
    
    $
    13,468
    
    
    $
    
    
    
    $
    (310
    )
    
    $
    13,158
    
    
    $
    11,078
    
    
    $
    
    
    
    $
    (242
    )
    
    $
    10,836
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CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands (except share and per share data)
   Amortized
    
    Estimated fair marketcost
    
    valueHeld-to-maturity2007 (short-term marketable securities)
    
    $
    6,578
    
    
    $
    6,3832008
    
    
    4,032
    
    
    
    3,9922009
    
    
    468
    
    
    
    461$
    11,078
    
    
    $
    10,836
 NOTE 4:  OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
 December 31,2005
    
    
    2006Government authorities
    
    $
    1,259
    
    
    $
    1,661Prepaid expenses
    
    
    784
    
    
    
    1,213Receivables related to unrecognized sold inventory
    
    
    2,148
    
    
    
    3,892Others
    
    
    950
    
    
    
    159$
    5,141
    
    
    $
    6,925
 NOTE 5:  INVENTORIES
 December 31,2005
    
    
    2006Raw materials
    
    $
    4,126
    
    
    $
    6,573Work in progress
    
    
    4,289
    
    
    
    2,257Finished products
    
    
    7,729
    
    
    
    18,481$
    16,144
    
    
    $
    27,311
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CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands (except share and per share data)
     NOTE 6:  PROPERTY AND EQUIPMENT
 December 31,2005
    
    
    2006Cost:Computers, manufacturing and peripheral equipment
    
    $
    8,374
    
    
    $
    9,807Office furniture and equipment
    
    
    1,171
    
    
    
    1,109Leasehold improvements
    
    
    514
    
    
    
    57710,059
    
    
    
    11,493Accumulated depreciation:Computers, manufacturing and peripheral equipment
    
    
    6,722
    
    
    
    7,789Office furniture and equipment
    
    
    569
    
    
    
    663Leasehold improvements
    
    
    304
    
    
    
    3817,595
    
    
    
    8,833Depreciated cost
    
    $
    2,464
    
    
    $
    2,660
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CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands (except share and per share data)
 NOTE 7:  OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
 December 31,2005
    
    
    2006Employees and payroll accruals
    
    $
    3,018
    
    
    $
    4,098Accrued expenses
    
    
    530
    
    
    
    1,401Royalties to Government authorities (Note 8a)
    
    
    1,190
    
    
    
    3,962Provision for warranty costs
    
    
    783
    
    
    
    1,135Other
    
    
    20
    
    
    
    31$
    5,541
    
    
    $
    10,627
 NOTE 8:  COMMITMENTS AND CONTINGENT LIABILITIES
 a.
    
    Royalties to the Office of the Chief Scientist:The Company participated in programs sponsored by the Israeli Government for the
support of research and development activities. Through December 31, 2006, the
Company had obtained grants from the Office of the Chief Scientist of the Israeli
Ministry of Industry, Trade and Labor (the OCS) aggregating to $ 18,542 for
certain of the Companys research and development projects. The Company was
obligated to pay royalties to the OCS, amounting to 3%-3.5% of the sales of the
products and other related revenues generated from such projects, equal to 100% of
the grants received, linked to the U.S. dollar and for grants received after January
1, 1999 also bearing interest at the rate of LIBOR. The obligation to pay these
royalties was contingent on actual sales of the products and in the absence of such
sales, no payment is required.In December 2006, the Company entered into an agreement with the OCS to conclude its
research and development grant programs sponsored by the OCS. Under the agreement
and as of December 31, 2006, the Company is obligated to repay the OCS approximately
$ 11,887, of which, $3,962 was recorded in short term liabilities and $ 7,925 in
long-term liabilities. The payment will be in six semiannual installments from 2007
through 2009. The outstanding obligation is linked to the change in Israels
Consumer Price Index and bears interest.In addition, the Company is required to continue reporting to the OCS regarding its
sales each quarter until the obligation is fully paid. At each report, the Company
is required to calculate the amount which the Company would have been obligated to
pay the OCS, had the Company paid a royalty of 3.15% on all
its sales for such quarter. If the resulting amount is more than one-sixth of the
$11,887, the Company will be required to pay the difference in the same payment
cycle. However, any such payments will be applied to the last semiannual
installments such that the total obligation will not be increased and the period for
paying the obligation may be shortened.
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CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands (except share and per share data)
 The total outstanding obligation as of December 31, 2006 in the amount of $11,887
was expensed in 2006 as part of the cost of revenues.b.
    
    Lease commitments:The Company and its subsidiaries lease their facilities and motor vehicles under
various operating lease agreements that expire on various dates. Aggregate minimum
rental commitments under non-cancelable leases at December 31, 2006, are as follows:
 Year ended December 31,
    
    Facilities
    
    
    Motor vehicles
    
    
    Total2007
    
    $
    671
    
    
    $
    843
    
    
    $
    1,5142008
    
    
    228
    
    
    
    612
    
    
    
    8402009
    
    
    134
    
    
    
    177
    
    
    
    3112010
    
    
    116
    
    
    
    70
    
    
    
    1862011 and thereafter
    
    
    352
    
    
    
    
    
    
    
    352$
    1,501
    
    
    $
    1,702
    
    
    $
    3,203
 Expenses for lease of facilities for the years ended December 31, 2004, 2005 and
2006 were approximately $ 889, $ 997 and $ 1,115, respectively (see also Note 12).Expenses for the lease of motor vehicles for the years ended December 31, 2004, 2005
and 2006 were approximately $ 629, $ 928 and $ 781, respectively.c.
    
    Charges and guarantees:As of December 31, 2006, the Company provided bank guarantees in an aggregate amount
of $ 2,183 with respect to tender offer guarantees and performance guarantees to its
customers.d.
    
    Potential claim:NEC Corporation has asserted that the Company has been using its intellectual
property in certain of the Companys products. The Company is currently in
discussions concerning NECs allegation. The Company believes, based on its
legal counselors opinion, that Ceragon does not infringe any valid claim of the NEC
patents at issue, and if any of these patents were to be tried, a competent judge or
jury would not find Ceragon liable to NEC for patent infringement damages. However,
the Company is not able to estimate the outcome of such discussions. Accordingly, no
provision was accrued in the financial statements as of December 31, 2006.
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CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands (except share and per share data)
 
 NOTE 9:  SHAREHOLDERS EQUITY
 The Ordinary shares of the Company are traded on NASDAQ National Market and on the
Tel Aviv Stock Exchange, under the symbol CRNT.e.
    
    General:The Ordinary shares entitle their holders to receive notice to participate and vote
in general meetings of the Company, the right to share in distributions upon
liquidation of the Company, and to receive dividends, if declared.f.
    
    Share options plans:
 1.
    
    Under the Companys 1996 Key Employee Share Incentive Plan, the
1997 Affiliate Employees Share Option Plan (the Plans), and the 2003 Share
Option Plan (the 2003 Plan), options may be granted to officers, directors,
employees and consultants of the Company or its subsidiaries. The options vest
primarily over three to five years. The options expire ten years from
the date of grant.
  2.
    
    Pursuant to its share option plans, the Company reserved for
issuance 12,973,188 Ordinary shares. As of December 31, 2006, the Company still
has 290,112 Ordinary shares available for future grant under the plans. Any
options, which are canceled or forfeited before the expiration date, become
available for future grants.
  Year ended December 31, 2006Weighted
    
    
    Weighted averageaverage
    
    
    remainingNumber
    
    
    exercise
    
    
    contractual term
    
    
    Aggregate intrinsicof options
    
    
    price
    
    
    (in years)
    
    
    valueOutstanding at beginning of year
    
    
    7,273,364
    
    
    $
    4.17Granted
    
    
    769,000
    
    
    $
    4.77Exercised
    
    
    (1,101,087
    )
    
    $
    1.92
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CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands (except share and per share data)
 Year ended December 31, 2006Weighted
    
    
    Weighted averageaverage
    
    
    remainingNumber
    
    
    exercise
    
    
    contractual term
    
    
    Aggregate intrinsicof options
    
    
    price
    
    
    (in years)
    
    
    valueForfeited
    
    
    (412,492
    )
    
    $
    5.56Outstanding at end of the year
    
    
    6,528,785
    
    
    $
    4.53
    
    
    
    6.70
    
    
    $
    9,233Options exercisable at end of
the year
    
    
    4,030,928
    
    
    $
    4.47
    
    
    
    5.69
    
    
    $
    7,062Vested and expected to vest
    
    
    6,065,617
    
    
    
    4.53
    
    
    
    6.70
    
    
    $
    8,578
      g.
    
    Dividends:In the event that cash dividends are declared in the future, such dividends will be
paid in NIS or in foreign currency subject to any statutory limitations. The Company
does not intend to pay cash dividends in the foreseeable future.
 NOTE 10:  TAXES ON INCOME
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CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands (except share and per share data)
 h.
    
    Tax benefits under the Law for the Encouragement of Industry (Taxes), 1969:The Company currently qualifies as an industrial company under the above law and,
as such, is entitled to certain tax benefits, mainly accelerated depreciation of
machinery and equipment, and the right to claim public issuance expenses, as a
deduction for tax purposes.i.
    
    Reduction in Israeli tax rates:On July 25, 2005, the Israeli Parliament passed the Law for the Amendment of the
Income Tax Ordinance (No.147 and Temporary Order), 2005 (the Amendment).Inter alia, the Amendment provides for a gradual reduction in the statutory
corporate tax rate in the following manner: 2006  31%, 2007  29%, 2008  27%, 2009
26% and 2010 and thereafter  25%. Furthermore, as from 2010, upon reduction of the
corporate tax rate to 25%, real capital gains will be subject to tax of 25%.j.
    
    Measurement of taxable income:Commencing with the year 2003, the Company has elected to file its tax return under
the Israeli Income Tax Regulations 1986 (Principles Regarding the Management of
Books of Account of Foreign Invested Companies and Certain Partnerships and the
Determination of Their Taxable Income). Such an elective obligates the Company for
three years. Accordingly, commencing the year 2003, results for tax purposes are
measured in terms of earnings in dollars.k.
    
    Tax benefits under the Law for the Encouragement of Capital Investments, 1959
(the Capital Investment Law):The Companys production facilities have been granted Approved Enterprise status
under the Capital Investments Law currently under three separate investment
programs. Pursuant to the Capital Investments Law, the Company has elected the
alternative benefits track and has waived Government grants in return for a tax
exemption.The Company is also a foreign investors company, as defined by the Capital
Investments Law, and, as such, is entitled to a 10-year period of benefits and may
be entitled to reduced tax rates of between 10% and 25% (depending on the percentage
of foreign ownership in each tax year).
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CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands (except share and per share data)
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CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands (except share and per share data)
     l.
    
    Deferred income taxes:Deferred income taxes reflect the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of the Companys
deferred tax assets and liabilities are as follows:
 December 31,2005
    
    
    2006Deferred tax assets:Net operating loss carryforward
    
    $
    22,299
    
    
    $
    28,024Temporary differences relating to reserve and allowances
    
    
    2,680
    
    
    
    1,054Total net deferred tax asset before valuation allowance
    
    
    24,979
    
    
    
    29,078Valuation allowance
    
    
    (24,979
    )
    
    
    (29,078
    )Net deferred tax asset
    
    $
    
    
    
    $
    
 
 *)
    
    Including deferred taxes on losses for Israeli income tax
purposes as of December 31, 2005 and 2006, derived from the exercise of
employee share options in the amount of $ 4,049 and $ 4,573, respectively. The
benefit derived from the exercise of employee share options was not F-30




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CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands (except share and per share data)
 recorded
through additional paid-in capital as required under APB 25 since a full
valuation allowance was provided in this respect. As a result, there is no
impact on the Companys shareholders equity and on the deferred taxes for each
of the years presented. As of December 31, 2006, the Company has provided valuation allowances of $ 29,078
in respect of deferred tax assets resulting from tax loss carryforward and other
temporary differences. The net change in the valuation allowance in the year 2006
amounted to $ 4,099. Management currently believes that since the Company has a
history of losses, it is more likely than not that the deferred tax regarding the
loss carryforward and other temporary differences will not be realized in the
foreseeable future.m.
    
    Net operating loss carryforward:The Company has accumulated losses for Israeli income tax purposes as of December
31, 2005 and 2006, in the amount of approximately $ 77,200 and $78,800,
respectively. These losses may be carried forward and offset against taxable income
in the future for an indefinite period.
 As of December 31, 2006, the Companys U.S. subsidiary had a U.S. federal net
operating loss carryforward of approximately $ 10,274 that can be carried forward
and offset against taxable income and that expires during the years 2019 to 2025.
Utilization of U.S. net operating losses may be subject to substantial annual
limitations due to the change in ownership provisions of the Internal Revenue Code
of 1986 and similar state law provisions. The annual limitations may result in the
expiration of net operating losses before utilization.n.
    
    Pre-tax income (loss) is comprised as follows:
 Year ended December 31,2004
    
    
    2005
    
    
    2006Domestic
    
    $
    2,016
    
    
    $
    (2,067
    )
    
    $
    (2,000
    )Foreign
    
    
    (402
    )
    
    
    (1,760
    )
    
    
    (3,460
    )$
    1,614
    
    
    $
    (3,827
    )
    
    $
    (5,460
    )
 o.
    
    Reconciliation of the theoretical tax expense to the actual tax expense:A reconciliation between the theoretical tax expense, assuming all income is taxed
at the statutory tax rate applicable to income of the Company and the actual tax
expense as reported in the statement of operations, is as follows:
 F-31




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##### Table of Contents



CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands (except share and per share data)
 Year ended December 31,2004
    
    
    2005
    
    
    2006Pre-tax income (loss) as reported
in the consolidated statements of
operations
    
    $
    1,614
    
    
    $
    (3,827
    )
    
    $
    (5,460
    )Statutory tax rate
    
    
    35
    %
    
    
    34
    %
    
    
    31
    %Theoretical tax expenses on the
above amount at the Israeli
statutory tax rate
    
    $
    565
    
    
    $
    (1,301
    )
    
    $
    (1,693
    )Non-deductible expenses
    
    
    75
    
    
    
    78
    
    
    
    132Deferred taxes on losses
(utilization of losses) and
temporary differences for which a
valuation allowance was provided
    
    
    (364
    )
    
    
    1,115
    
    
    
    1,078Tax adjustment due to Approved
Enterprises different tax rate
    
    
    (202
    )
    
    
    186
    
    
    
    120Other
    
    
    (74
    )
    
    
    (78
    )
    
    
    363Actual tax expense
    
    $
    
    
    
    $
    
    
    
    $
    
 NOTE 11:  GEOGRAPHIC INFORMATION AND SELECTED STATEMENTS OF OPERATIONS DATA
 p.
    
    Segments, customers and geographical information:The Company applies SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information (SFAS 131). The Company operates in one reportable segment
(see Note 1 for a brief description of the Companys business). The total revenues
are attributed to geographic areas based on the location of the end customer.The following presents total revenues for the years ended December 31, 2004, 2005
and 2006 and long-lived assets as of December 31, 2004, 2005 and 2006:
 Year ended December 31,2004
    
    
    2005
    
    
    2006Revenues from sales to external customers:North America
    
    $
    16,449
    
    
    $
    19,738
    
    
    $
    28,162Europe, Middle East and Africa
    
    
    22,006
    
    
    
    36,048
    
    
    
    41,149Asia-Pacific
    
    
    14,001
    
    
    
    9,877
    
    
    
    32,358Latin America
    
    
    2,375
    
    
    
    8,114
    
    
    
    6,746$
    54,831
    
    
    $
    73,777
    
    
    $
    108,415Property and equipment, net, by
geographic areas:Israel
    
    $
    2,295
    
    
    $
    2,202
    
    
    $
    2,339Others
    
    
    221
    
    
    
    262
    
    
    
    321$
    2,516
    
    
    $
    2,464
    
    
    $
    2,660Major customer data as a percentage of
total revenues:
 F-32




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CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands (except share and per share data)
 Year ended December 31,2004
    
    
    2005
    
    
    2006Customer A
    
    
    14
    
    
    
    *)-
    
    
    
    *)-Customer B
    
    
    14
    
    
    
    *)-
    
    
    
    17Customer C
    
    
    *)-
    
    
    
    13
    
    
    
    *)-
 
 *)
    
    Less than 10% of total revenues. q.
    
    Financial income, net:
 Year ended December 31,2004
    
    
    2005
    
    
    2006Financial income:Interest on marketable securities and bank deposits
    
    $
    714
    
    
    $
    814
    
    
    $
    1,044Foreign currency translation differences
    
    
    155
    
    
    
    
    
    
    
    311869
    
    
    
    814
    
    
    
    1,355Financial expenses:Bank commissions
    
    
    (195
    )
    
    
    (172
    )
    
    
    (71
    )Foreign currency translation differences
    
    
    
    
    
    
    (35
    )
    
    
    (195
    )
    
    
    (207
    )
    
    
    (71
    )$
    674
    
    
    $
    607
    
    
    $
    1,284
 r.
    
    Net earnings (loss) per share:The following table sets forth the computation of basic and diluted net earnings
(loss) per share:
 Year ended December 31,2004
    
    
    2005
    
    
    2006Numerator:Numerator for basic and diluted
net earnings (loss) per share-
income (loss) available to
shareholders of Ordinary shares
    
    $
    1,614
    
    
    $
    (3,827
    )
    
    $
    (5,460
    )Denominator:Denominator for basic net
earnings (loss) per share 
weighted average number of
Ordinary shares
    
    
    25,066,937
    
    
    
    26,137,121
    
    
    
    26,728,053Effect of dilutive securities:Employee share options
    
    
    3,002,907
    
    
    
    *
    ) -
    
    
    *
    ) -
 F-33




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##### Table of Contents



CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands (except share and per share data)
 Year ended December 31,2004
    
    
    2005
    
    
    2006Denominator for diluted net
earnings (loss) per share 
adjusted weighted average
number of shares
    
    
    28,069,844
    
    
    
    26,137,121
    
    
    
    26,728,053
 
 *)
    
    Antidilutive. NOTE 12:  RELATED PARTY BALANCES AND TRANSACTIONS
       Year ended December 31,2004
    
    2005
    
    2006Cost of revenues
    
    $
    934
    
    
    $
    1,861
    
    
    $
    3,106Research and development expenses
    
    $
    381
    
    
    $
    445
    
    
    $
    221
 F-34




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CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands (except share and per share data)
 Year ended December 31,2004
    
    2005
    
    2006Selling and marketing expenses
    
    $
    291
    
    
    $
    356
    
    
    $
    184General and administrative expenses
    
    $
    142
    
    
    $
    160
    
    
    $
    43Balances with related parties:
 December 31,2005
    
    
    2006Trade payables, other accounts payable and accrued
expenses
    
    $
    60
    
    
    $
    62
 F-35