As filed with the Securities and Exchange
Commission on June 30, 2004

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 20-F

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

For the fiscal year ended December 31, 2003Commission File No. 0-30862

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CERAGON NETWORKS LTD.
(Exact name of
Registrant as specified in its charter)

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Israel(Jurisdiction
of incorporation or organization)

24 Raoul Wallenberg Street, Tel Aviv 69719,
Israel(Address of
principal executive offices)

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

None

(Title of each Class)

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

Ordinary Shares, Par Value NIS .01

(Title of Class)

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

None

(Title of Class)

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Indicate the number of outstanding shares of each of the issuers
classes of capital or common stock as of the close of the period covered by the
annual report:  24,675,313 Ordinary
Shares, NIS 0.01 par value.

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:  Yes
xNooIndicate by check mark which financial statement item the registrant
has elected to follow:  Item 17
oItem 18x

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TABLE OF CONTENTS

|         |                                                                                | Page
|-------- | ------------------------------------------------------------------------------ | ----
|         |                                                                                |     
|ITEM 1.  | Identity of Directors, Senior Management and Advisers                          | 1   
|ITEM 2.  | Offer Statistics and Expected Timetable                                        | 1   
|ITEM 3.  | Key Information                                                                | 1   
|ITEM 4.  | Information on the Company                                                     | 14  
|ITEM 5.  | Operating and Financial Review and Prospects                                   | 28  
|ITEM 6.  | Directors, Senior Management and Employees                                     | 38  
|ITEM 7.  | Major Shareholders and Related Party Transactions                              | 50  
|ITEM 8.  | Financial Information                                                          | 53  
|ITEM 9.  | The Offer and Listing                                                          | 55  
|ITEM 10. | Additional Information                                                         | 56  
|ITEM 11. | Quantitative and Qualitative Disclosures About Market Risk                     | 62  
|ITEM 12. | Description of Securities Other than Equity Securities                         | 63  
|ITEM 13. | Defaults, Dividend Arrearages and Delinquencies                                | 64  
|ITEM 14. | Material Modifications to the Rights of Security Holders and Use of
  Proceeds | 64  
|ITEM 15. | Controls and Procedures                                                        | 64  
|ITEM 16. | [RESERVED]                                                                     | 64  
|ITEM 16A | Audit Committee Financial Expert                                               | 64  
|ITEM 16B | Code of Ethics                                                                 | 64  
|ITEM 16C | Principal Accounting Fees and Services                                         | 65  
|ITEM 16D | Exemptions from the Listing Standards for Audit Committees                     | 65  
|ITEM 16E | Purchases of Equity Securities by the Issuer and Affiliated Purchasers         | 65  
|ITEM 17. | Financial Statements                                                           | 66  
|ITEM 18. | Financial Statements                                                           | 66  
|ITEM 19. | Exhibits                                                                       | 66  

- i -

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PART I

ITEM
1.          IDENTITY OF
DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

ITEM
2.          OFFER STATISTICS
AND EXPECTED TIMETABLE

Not applicable.

ITEM
3.          KEY INFORMATION

Selected Financial Data

The
selected financial data of Ceragon Networks Ltd. and its consolidated
subsidiaries (together, Ceragon, the company we, or us) set forth below
is derived from our consolidated financial statements, which were prepared in
U.S. dollars and in accordance with United States Generally Accepted Accounting
Principles (U.S. GAAP) and cover each of the years in the five-year period
ended December 31, 2003.  The selected
consolidated financial data set forth below should be read in conjunction with
Item 5 of this annual report entitled Operating and Financial Review and
Prospects and our consolidated financial statements and the notes to those
financial statements included elsewhere in this annual report.

|                                                                                |  | 1999      |        | 2000 |   | 2001    |   | 2002 |         | 2003 |  
|------------------------------------------------------------------------------- |  | --------- | ------ | ---- | - | ------- | - | ---- | ------- | ---- | -
|                                                                                |  |           |        |      |   |         |   |      |         |      |  
|                                                                                |  | Thousands |       
|                                                                                |  |           |       
|Consolidated Statement of
       Operations Data:                               |  |           |        |      |   |         |   |      |         |      |  
|Revenues                                                                        |  | $         | 4,552  |      | $ | 29,197  |   | $    | 24,852  |      | $
|Cost of
  revenues                                                              |  |           | 3,624  |      |   | 16,605  |   |      | 45,282  |      |  
|                                                                                |  |           |        |      |   |         |   |      |         |      |  
|                                                                                |  |           |        |      |   |         |   |      |         |      |  
|Gross profit
  (loss)                                                           |  |           | 928    |      |   | 12,592  |   |      | (20,430 | )    |  
|Operating
  expenses:                                                           |  |           |        |      |   |         |   |      |         |      |  
|                                                                                |  |           |        |      |   |         |   |      |         |      |  
|Research
  and development                                                      |  |           | 5,000  |      |   | 9,904   |   |      | 12,967  |      |  
|Less:
  grants and participations                                               |  |           | 1,621  |      |   | 2,211   |   |      | 2,660   |      |  
|                                                                                |  |           |        |      |   |         |   |      |         |      |  
|Research
  and development, net                                                 |  |           | 3,379  |      |   | 7,693   |   |      | 10,307  |      |  
|                                                                                |  |           |        |      |   |         |   |      |         |      |  
|Selling
  and marketing, net                                                    |  |           | 2,560  |      |   | 8,790   |   |      | 11,924  |      |  
|                                                                                |  |           |        |      |   |         |   |      |         |      |  
|General
  and administrative.                                                   |  |           | 483    |      |   | 1,926   |   |      | 5,770   |      |  
|Amortization
  of deferred stock
            compensation (a)                   |  |           | 1,758  |      |   | 9,529   |   |      | 6,431   |      |  
|Restructuring
  and non-recurring
            expenses
  (income), net          |  |           | --     |      |   | --      |   |      | 4,750   |      |  
|Total
  operating expenses                                                      |  |           | 8,107  |      |   | 27,938  |   |      | 39,182  |      |  
|                                                                                |  |           |        |      |   |         |   |      |         |      |  
|Operating
  loss                                                                |  |           | (7,252 | )    |   | (15,346 | ) |      | (59,612 | )    |  
|Financing
  income, net                                                         |  |           | (89    | )    |   | 2,470   |   |      | 2,769   |      |  
|Other
  financial expenses--non-cash
       charge relating to puttable warrant |  |           | --     |      |   | --      |   |      | --      |      |  
|                                                                                |  |           |        |      |   |         |   |      |         |      |  
|                                                                                |  |           |        |      |   |         |   |      |         |      |  
|Net loss                                                                        |  |           | (7,341 | )    |   | (12,876 | ) |      | (56,843 | )    |  
|Dividend
  related to convertible
       preferred shares                       |  |           | --     |      |   | (22,328 | ) |      | --      |      |  

1

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|                                                                                                         |  | 1999 |           | 2000 |   | 2001       |   | 2002 |            | 2003 |  
|-------------------------------------------------------------------------------------------------------- |  | ---- | --------- | ---- | - | ---------- | - | ---- | ---------- | ---- | -
|                                                                                                         |  |      |           |      |   |            |   |      |            |      |  
|                                                                                                         |  |      |           |      |   |            |   |      |            |      |  
|Net loss attributable to ordinary   shareholders                                                         |  | $    | (7,341    | )    | $ | (35,204    | ) | $    | (56,843    | )    | $
|                                                                                                         |  |      |           |      |   |            |   |      |            |      |  
|                                                                                                         |  |      |           |      |   |            |   |      |            |      |  
|Basic and
  diluted net loss per share                                                                   |  | $    | (1.42     | )    | $ | (3.06      | ) | $    | (2.69      | )    | $
|                                                                                                         |  |      |           |      |   |            |   |      |            |      |  
|                                                                                                         |  |      |           |      |   |            |   |      |            |      |  
|Weighted
  average number of shares
       used in computing basic and
       diluted net loss per share |  |      | 5,161,000 |      |   | 11,501,722 |   |      | 21,099,336 |      |  
|                                                                                                         |  |      |           |      |   |            |   |      |            |      |  

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

| |                                                            |  | 1999      |       | 2000 |   | 2001  |  | 2002 |       | 2003 |  
| | ---------------------------------------------------------- |  | --------- | ----- | ---- | - | ----- |  | ---- | ----- | ---- | -
| |                                                            |  |           |       |      |   |       |  |      |       |      |  
| |                                                            |  | Thousands |      
| |                                                            |  |           |      
| |                                                            |  |           |       |      |   |       |  |      |       |      |  
| | Cost of
  revenues                                         |  | $         | 73    |      | $ | 603   |  | $    | 400   |      | $
| | Research and
  development expenses                        |  |           | 470   |      |   | 3,408 |  |      | 2,248 |      |  
| | Selling and
  marketing expenses                           |  |           | 664   |      |   | 3,085 |  |      | 1,984 |      |  
| |                                                            |  |           |       |      |   |       |  |      |       |      |  
| | General and
  administrative expenses                      |  |           | 551   |      |   | 2,433 |  |      | 1,799 |      |  
| |                                                            |  |           |       |      |   |       |  |      |       |      |  
| |                                                            |  |           |       |      |   |       |  |      |       |      |  
| | Total
  amortization of deferred stock
       compensation |  | $         | 1,758 |      | $ | 9,529 |  | $    | 6,431 |      | $
| |                                                            |  |           |       |      |   |       |  |      |       |      |  

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.

| |                                                                                                               |  | 1999      |       | 2000 |   | 2001    |  | 2002 |        | 2003 |  
| | ------------------------------------------------------------------------------------------------------------- |  | --------- | ----- | ---- | - | ------- |  | ---- | ------ | ---- | -
| |                                                                                                               |  |           |       |      |   |         |  |      |        |      |  
| |                                                                                                               |  | Thousands |      
| |                                                                                                               |  |           |      
| | Consolidated Balance Sheet Data:                                                                              |  |           |       |      |   |         |  |      |        |      |  
| | Cash and
  cash equivalents, short and
  long term bank deposits, short and
  long term marketable securities |  | $         | 1,149 |      | $ | 80,320  |  | $    | 53,721 |      | $
| | Working capital                                                                                               |  |           | 3,365 |      |   | 104,558 |  |      | 55,361 |      |  
| | Total assets                                                                                                  |  |           | 7,938 |      |   | 128,050 |  |      | 72,086 |      |  
| | Total long
  term debt                                                                                        |  |           | 1,173 |      |   | 1,025   |  |      | 1,511  |      |  
| | Shareholders
  equity (deficit)                                                                              |  |           | 3,330 |      |   | 111,068 |  |      | 60,619 |      |  

Risk
Factors

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

| | our strategy                                                 
|- | -------------------------------------------------------------
|  |                                                              
| | market
  demand and acceptance of our products and technology
|  |                                                              
| | projected
  capital expenditures and liquidity               

2

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

Forward-looking
statements can be identified by the use of forward-looking terminology such as
may, will, expect, anticipate, estimate, continue or other similar
words, but are not the only way these statements are identified.  These statements discuss future
expectations, contain projections of results of operations or of financial
condition or state other forward-looking information.  When considering such forward-looking
statements, you should keep in mind the risk factors and other cautionary
statements in this annual report.  These
statements may be found in Item 4:  Information
on the Company and Item 5:  Operating
and Financial Review and Prospects and in this annual report generally.  Our actual results could differ materially
from those anticipated in these forward-looking statements as a result of
various factors, including all the risks discussed in Risk Factors and
elsewhere in this annual report.

We
undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
 In light of these risks, uncertainties,
and assumptions, the forward-looking events discussed in this annual report
might not occur.

Risks Relating to
Our Business

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

Although we
reported a profit in the first quarter of 2004, we have incurred operating and
net losses in every fiscal year since our inception and we may continue to
incur losses in the future.  We reported
net losses of $7.3 million for 1999, $12.9 million for 2000, $56.8 million for
2001, $14.4 million for 2002 and $7.7 million for 2003.  As of December 31, 2003, our accumulated
deficit was $126.0 million.  In order to
meet expanding sales and operations requirements, our expenses may increase.  As a result, net cash outflows and operating
net losses may continue for the near term. 
If our sales do not increase or if our expenses increase at a greater
pace than our revenues, continuing profitability may not be achieved.  We may not be able to sustain or increase
profitability on a quarterly or annual basis.

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

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

Because of the continuing economic uncertainty
in the global economy and continued tightening of global capital markets for
telecommunications projects, the demand for our products and services may
increase at a slower than anticipated rate.

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

3

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

Our
products have lengthy sales cycles.  For
example, it typically takes from six to twelve months after we first begin
discussions with a prospective customer before we receive an order from that
customer.  Because of this, we are often
required to devote more time to, and spend more money on, marketing our
products than would be necessary if sales were made more quickly.  We believe that the length of the sales
cycles will continue to increase in light of the more conservative spending by
many customers and potential customers due to current market conditions.

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

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

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

All of our
revenues are generated from sales of a single family of products, known as
FibeAir.  We expect sales of our
FibeAir family of products to continue to account for all of our revenues for
the foreseeable future.  As a result, we
are more likely to be adversely affected by a reduction in demand for these products
than companies that sell multiple product families.  We also may not succeed in reducing the risk associated with any
slowdown in demand for our FibeAir products.

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

We
currently rely on independent manufacturers to produce circuit boards and other
components used in our products.  We do
not have long-term contracts with most of these independent manufacturers.  We have experienced and may in the future
experience delays in shipments from these manufacturers.  This could delay product shipments to our
customers.  We may in the future
experience other manufacturing problems, including inferior quality and
insufficient quantities of components. 
These delays, quality problems and shortages could result in delayed
deliveries, penalties, equipment replacement costs and possible cancellation of
orders.  If our manufacturers experience
financial, operational, manufacturing capacity or other difficulties, our
supply may be disrupted and we may be required to seek alternate
manufacturers.  In addition, due to
continuing economic uncertainty, our suppliers have experienced and are
continuing to experience various financial difficulties which may impact their
ability to supply the materials, components and subsystems that we
require.   We may be unable to secure alternate manufacturers that
meet our needs.  Moreover, qualifying
new manufacturers and commencing volume production is expensive and time
consuming.  If we are required or choose
to change manufacturers, our sales and our customer relationships may suffer.

4

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

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

| | Our
  suppliers could increase component prices significantly at any time and with
  immediate effect.  This would increase
  our component procurement costs and could result in reduced gross margins.                                                                                                                                                                                                                                                                                
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | Our
  suppliers may experience shortages in components and interrupt or delay their
  shipments to us.  This may delay our
  product shipments to our customers and result in penalties and/or
  cancellation of orders for our products.                                                                                                                                                                                                                                               
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | Our
  suppliers could discontinue the manufacture or supply of components used in
  our systems.  If this occurs and we
  are unable to develop alternative sources for components, we might need to
  modify our products.  This would
  likely interrupt our manufacturing process and could cause delays in our
  product shipments.  Moreover, a
  significant modification in our product design may increase our manufacturing
  costs and force us to accept lower gross margins.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | We may
  purchase more inventory than is immediately required to compensate for
  potential component shortages or discontinuation.  Such inventory can become obsolete.                                                                                                                                                                                                                                                                                                                

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

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

| | its capacity
  to handle growing volumes of traffic;                                     
|- | -----------------------------------------------------------------------------------------
|  |                                                                                          
| | its cost
  effectiveness;                                                                
|  |                                                                                          
| | its
  reliability and security;                                                          
|  |                                                                                          
| | the
  availability of sufficient equipment, frequency bands and installation sites;
  and
|  |                                                                                          
| | its
  performance in extreme weather conditions.                                         

If
our products do not address these factors in a manner which satisfies the
requirements of prospective customers and end-users, the demand for our
products may be adversely affected and we may not be able to generate significant
revenues or operate profitably, despite our profitable first quarter of 2004.

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

The market
for our products is new and emerging. 
It is characterized by rapid technological advances, changing customer
needs and evolving industry standards. 
Accordingly, our success will depend on our ability to:

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

5

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| | meet
  evolving customer requirements;                       
|- | -------------------------------------------------------------
|  |                                                              
| | enhance our
  current product offerings; and                 
|  |                                                              
| | deliver
  products through appropriate distribution channels.

We
are continuously seeking to develop new products and enhance our existing
products to support additional frequency bands and higher transmission speeds
subject to current budget constraints. 
Developing new products and product enhancements requires significant
capital expenditures and research and development resources and we are
therefore being much more selective in these investments.  We may not be successful in enhancing our
existing products or developing new products in response to technological
advances or to satisfy increasingly sophisticated customer needs in a timely
and cost-effective manner.

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

The market
for broadband wireless equipment is rapidly evolving, fragmented, highly
competitive and subject to rapid technological change.  Increased competition could result in
reduced demand for our products, price reductions and reduced gross margins,
any of which could seriously harm our business.  A number of 
communications equipment suppliers, including Stratex Networks, Nera
Telecommunications, Microwave Communications Division of Harris Corporation,
NEC, Marconi, SIAE, Siemens AG, Alcatel, L.M. Ericsson, as well as several
private companies currently in the startup stage, and a number of other
companies have developed or are developing products that may compete with our
products.

Some of our
competitors are substantially larger than we are and have longer operating
histories and greater financial, sales, marketing, distribution, technical,
manufacturing and other resources than we have.  Some also have greater name recognition and a larger customer
base than we have.  Many of our competitors
have well-established relationships with our current and potential customers
and have extensive knowledge of our target markets.  Some of our competitors have product lines that compete with
ours, and are also original equipment manufacturers (OEMs) through which we
market and sell our products. As a result, our competitors may be able to
respond more quickly to evolving industry standards and changes in customer
requirements, or to devote greater resources to the development, promotion and
sale of their products than we can.  We
expect to face increasing competitive pressures from both current and future
competitors.  In addition, current and
potential competitors may make strategic acquisitions or establish cooperative
relationships among themselves or with third parties to increase their ability
to gain market share rapidly.  We also
expect that industry consolidation will increase competition.

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

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

We
participate in a highly volatile industry that is characterized by vigorous
competition for market share and rapid technological development. Furthermore,
our customers and potential customers are increasingly concentrating on
limitations and reductions on their capital expenditures as well as return on
investment (ROI) in connection with their purchasing decisions.  These factors have resulted in aggressive
pricing practices and growing competition both from start-up companies and from
well-capitalized telecommunication systems providers.  Manufacturers of digital microwave telecommunications equipment
are experiencing price pressure, which has resulted in downward pricing
pressure on our products. Our future profitability is dependent upon our
ability to improve manufacturing efficiencies, reduce costs of materials used
in our products, and to continue to introduce new products and product
enhancements. Any inability by us to effectively respond to such situation may
harm our business, financial condition and results of operations.

6

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

Our
products also compete to a certain extent with other high-speed communications
solutions, including free space optics, low to medium capacity point-to-point
radios, fiber optic lines, and other wireless technologies.  Some of these technologies utilize existing
installed infrastructure and have achieved significantly greater market
acceptance and penetration than high-capacity broadband wireless technologies.  We expect to face increasing competitive
pressures from both current and future technologies in the broadband access
market.

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

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

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

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

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

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

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

7

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

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

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

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

Due to our significant volume of
international sales and our rapid expansion into new markets, we are
susceptible to a number of political, economic and geographic risks that could
harm our business if they occur.

We are
highly dependent on sales to customers outside the United States. We expect
that international sales will continue to account for the majority of our net
product sales for the foreseeable future. As a result, the occurrence of any
international, political, economic or geographic events that adversely affects
our business could result in significant revenue shortfalls.

Any such
revenue shortfalls could cause our business, financial condition and results of
operations to be harmed. Some of the risks and challenges of doing business
internationally include:

| | unexpected
  changes in regulatory requirements;                                                  
|- | --------------------------------------------------------------------------------------------------
|  |                                                                                                   
| | fluctuations
  in foreign currency exchange rates;                                                
|  |                                                                                                   
| | imposition
  of tariffs and other barriers and restrictions;                                      
|  |                                                                                                   
| | management
  and operation of an enterprise spread over various countries;                        
|  |                                                                                                   
| | burden of
  complying with a variety of foreign laws;                                             
|  |                                                                                                   
| | general
  economic and geopolitical conditions, including inflation and trade
  relationships; and
|  |                                                                                                   
| | payment
  delays and uncertainties.                                                               

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

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

| | volume and
  timing of product orders received and delivered during the quarter;                             
|- | -------------------------------------------------------------------------------------------------------------
|  |                                                                                                              
| | our ability
  and the ability of our key suppliers to respond to changes made by customers
  in their orders;
|  |                                                                                                              
| | timing of
  new product introductions by us or our competitors;                                              

8

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| | changes in
  the mix of products sold by us;                                             
|- | -----------------------------------------------------------------------------------------
|  |                                                                                          
| | cost and
  availability of components and subsystems;                                    
|  |                                                                                          
| | downward
  pricing pressure on our products;                                             
|  |                                                                                          
| | adoption of
  new technologies and industry standards;                                   
|  |                                                                                          
| | competitive
  factors, including pricing, availability and demand for competing products;
|  |                                                                                          
| | ability of
  our customers to obtain financing to enable their purchase of our products; 
|  |                                                                                          
| | fluctuations
  in foreign currency exchange rates;                                       
|  |                                                                                          
| | regulatory
  developments; and                                                           
|  |                                                                                          
| | general
  economic conditions in the United States and internationally.                  

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

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

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

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

Radio
communications are subject to regulation by United States and foreign laws and
international treaties. Generally, our products must conform to a variety of
United States and international requirements established to avoid interference
among users of transmission frequencies and to permit interconnection of
telecommunications equipment. Any delays in compliance with respect to our
future products could delay the introduction of such products.

In addition,
both in the United States and internationally, we are affected by the
allocation and auction of the radio frequency spectrum by governmental
authorities. Such governmental authorities may not allocate sufficient radio
frequency spectrum for use by our products or we may not be successful in
obtaining regulatory approval for our products from these authorities.
Historically, in many developed countries, the unavailability of frequency
spectrum has inhibited the growth of wireless telecommunications networks. In
addition, to operate in a jurisdiction, we must obtain regulatory approval for
our products. Each jurisdiction in which we market our products has its own
regulations governing radio communications. Products that support emerging
wireless telecommunications services can be marketed in a jurisdiction only if
permitted by suitable frequency allocations and regulations, and the process of
establishing new regulations is complex and lengthy. If we are unable to obtain
sufficient allocation of radio frequency spectrum by the appropriate
governmental authority or obtain the proper regulatory approval for our
products, our business, financial condition or results of operations may be
harmed.

9

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We are increasingly engaged in supplying
turnkey solutions to our customers, often in developing nations, which are
subject to extensive acceptance testing procedures.  Any loss of products and delay or failure in such acceptance
tests would significantly affect our revenues and operating expenses.

As we
continue to expand our geographic footprint, we are increasingly engaged in
supplying turnkey solutions for our customers, often in developing
nations.  We act as prime contractor and
equipment supplier for these projects and provide transportation, installation,
testing, maintenance and various other services required for these
projects.  We typically bear the risks
of loss and damage and title to our products until the customer has issued an
acceptance certificate upon successful completion of rigorous acceptance
tests.  If our products are damaged or
stolen, or if the products do not pass the acceptance tests, the customer could
refuse to pay us and we would incur substantial costs, including fees owed to
our subcontractors, increased insurance premiums, transportation costs, and
expenses related to manufacturing the products.  We would be unable to recognize any revenue generation from such
projects in the event of such contingencies. 
Moreover, in such a case, we may not be able to repossess the equipment,
thus, suffering additional losses.

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

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

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

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

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

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

10

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

Our ability
to compete will depend, in part, on our ability to obtain and enforce
intellectual property protection for our technology in the United States and
internationally. We currently rely upon a combination of trade secrets,
trademark, copyright, patents and contractual rights to protect our
intellectual property.  In addition, we enter into confidentiality and
invention assignment agreements with our employees, and enter into
non-disclosure agreements with our suppliers and appropriate customers so as to
limit access to and disclosure of our proprietary information. We cannot assure
you that any steps taken by us will be adequate to deter misappropriation or
impede independent third party development of similar technologies. In the
event that such intellectual property arrangements are insufficient, our
business, financial condition and results of operations could be harmed. We
cannot assure you that the protection provided to our intellectual property by
the laws and courts of foreign nations will be substantially similar to the
remedies available under United States law. Furthermore, we cannot assure you
that third parties will not assert infringement claims against us based on
foreign intellectual property rights and laws that are different from those
established in the United States.

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

The
wireless telecommunications industry is characterized by vigorous protection
and pursuit of intellectual property rights, which has resulted in often
protracted and expensive litigation. We may in the future be notified that we
are infringing certain patent or other intellectual property rights of others.
Such litigation or claim could result in substantial costs and diversion of
resources. In the event of an adverse result of any such litigation, we could
be required to pay substantial damages, cease the licensing of allegedly
infringing technology or the sale of allegedly infringing products and expend
significant resources to develop non-infringing technology or to obtain
licenses for the infringing technology. We cannot assure you that we would be
successful in developing such non-infringing technology or that any license for
the infringing technology would be available to us on commercially reasonable
terms, if at all.

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

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

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

As of December 31, 2003, Yehuda and Zohar Zisapel, who are brothers
that do not vote as a group and who do not have a voting agreement,
beneficially own, directly or through entities they control, 24.5% of the
outstanding ordinary shares.  As a
result, these shareholders may control the outcome of various actions that
require shareholder approval.  For
example, they may be able to elect our directors, delay or prevent a
transaction in which shareholders might receive a premium over the prevailing
market price for their shares or prevent changes in control or management.

11

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

We do not
believe that during 2003 we were a passive foreign investment company.  Foreign companies may be characterized as a
passive foreign investment company for U.S. federal income tax purposes if for
any taxable year 75% or more of such companys gross income is passive income,
or at least 50% of the average value of all such companys assets are held for
the production of, or produce, passive income. 
If we are characterized as a passive foreign investment company, our
U.S. shareholders may suffer adverse tax consequences.  These consequences may include having gains
realized on the sale of our ordinary shares treated as ordinary income, rather
than capital gain income, and having potentially punitive interest charges
apply to the proceeds of share sales.

Risks Relating to
Our Location in Israel

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

Our
principal offices, manufacturing facilities and research and development
facilities are located in Israel. 
Political, economic and military conditions in Israel could directly
affect our operations.  We could be
adversely affected by any major hostilities involving Israel, the interruption
or curtailment of trade between Israel and its trading partners, a significant
increase in inflation, or a significant downturn in the economic or financial
condition of Israel.  Since October
2000, there has been an increase in hostilities between Israel and the
Palestinians, which has adversely affected the peace process and has negatively
influenced our relationship with several Arab countries.  Such ongoing hostilities may hinder Israels
international trade relations and may limit the geographic markets where we can
sell our products.  Such events could
have a material adverse effect on our operations and business.

Some
neighboring countries, as well as certain companies and organizations, continue
to participate in a boycott of Israeli firms and others doing business with
Israel and Israeli companies. We are also precluded from marketing our products
to certain of these countries due to U.S. and Israeli regulatory
restrictions.  Because none of our
revenue is currently derived from sales to these countries, we believe that,
the boycott has not had a material adverse effect on us.  However, the boycott, restrictive laws,
policies or practices directed towards Israel or Israeli businesses could
adversely affect us.

Some of our
executive officers and employees in Israel are obligated to perform up to
approximately 36 days of military reserve duty annually, depending on their age
and prior position in the army. 
Additionally, they may be called to active duty at any time under emergency
circumstances.  Our operations could be
disrupted by the absence for a significant period of one or more of our
executive officers or key employees due to military service, and any
significant disruption in our operations could harm our business.  We believe that we have operated effectively
given these requirements since we began operations.  Nevertheless, the full impact on our workforce or business if
some of our executive officers and employees will be called upon to perform
military service, especially in times of national emergency, is difficult to
predict.

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

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

A majority
of our revenues are in dollars and Euro, while a portion of our expenses,
principally salaries and the related personnel expenses for Israeli employees
and consultants, local vendors and subcontractors, are in new Israeli shekels,
or NIS.  As a result, we are exposed to
the risk that the rate of inflation in Israel will exceed the rate of
devaluation of the NIS in relation to the dollar and/or Euro or that the timing
of this devaluation lags behind inflation in Israel.  This would have the effect of increasing the dollar cost of our
operations and would therefore have an adverse effect on our dollar-measured
results of operations.

12

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

We
currently receive grants from the Government of Israel through the Office of
the Chief Scientist of the Ministry of Industry, Trade and Labor, or Chief
Scientist, for the financing of a significant portion of our research and
development expenditures in Israel.  In
2001, 2002, and 2003 we received or accrued Chief Scientist grants totaling
approximately $2.7 million, $1.9 million, and $2.0 million representing
approximately 21%, 21%, and 22% respectively, of our total research and
development expenditures in these periods. 
To maintain our eligibility for these grants we must continue to meet
several conditions under the grant programs, including paying royalties with
respect to the grants received.  In
addition, the terms of the Chief Scientist grants limit our ability to
manufacture products or transfer technologies, outside of Israel, if such
products or technologies were developed using Chief Scientist grants.  In addition, if we fail to comply with any
of the conditions imposed by the Chief Scientist, we may be required to refund
any payments previously received, together with interest and penalties.

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

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

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

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

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

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

13

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

Provisions
of Israeli corporate law may have the effect of delaying, preventing or making
more difficult a merger with, or acquisition, of us. The Israeli Companies Law
generally provides that a merger be approved by the board of directors and a
majority of the shares present and voting on the proposed merger at a meeting
called upon at least 21 days notice. 
For purposes of the shareholder vote, unless a court rules otherwise,
the merger will not be deemed approved if a majority of the shares not held by
the other party to the merger  (or by
any person who holds 25% or more of the shares or the right to appoint 25% or
more of the directors of the other party or its general manager) have voted against
the merger.  Upon the request of any
creditor of a party to the proposed merger, a court may delay or prevent the
merger if it concludes that there is a reasonable concern that, as a result of
the merger, the surviving company will be unable to satisfy the obligations of
the surviving company.  Finally, a
merger may not be completed unless at least 70 days have passed since the
filing of the merger proposal signed by both parties with the Israeli Registrar
of Companies.

The
Companies Law also provides that an acquisition of shares in a public company
must be made by means of a tender offer if, as a result of the acquisition, the
purchaser would become a 25% or greater shareholder of the company, unless
there is already another 25% or greater shareholder of the company.  Similarly, an acquisition of shares must be
made by means of a tender offer, if as a result of the acquisition, the
purchaser would become a 45% or greater shareholder of the company, unless
there is already a majority shareholder of the company.  In any event, if as a result of an
acquisition of shares, the acquirer would hold more than 90% of a companys
shares, the acquisition must be made by means of a tender offer for all of the
shares.  The described restrictions
could prevent or make more difficult an acquisition of Ceragon which could
depress our share price.

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

ITEM
4.          INFORMATION ON
THE COMPANY

History and Development of the Company

We were
incorporated under the laws of the state of Israel on July 23, 1996 as Giganet
Ltd.  We changed our name to Ceragon
Networks Ltd. on September 6, 2000, as part of the resolution of a dispute
concerning the use of the word Giganet. 
We operate under the Israeli Companies Law, 1999.  Our registered office is located at 24 Raoul
Wallenberg Street, Tel Aviv 69719, Israel and the telephone number is
011-972-3-645-5733.  Our world wide web
address is www.ceragon.com.  Our agent
for service of process in the United States is Ceragon Networks, Inc., our
wholly owned U.S. subsidiary and North American headquarters, located at 10
Forest Avenue, Paramus, New Jersey 07652.

In the
years ending December 31, 2003, 2002 and 2001, our capital expenditures, net of
investment grants from the Government of Israel, were $0.4 million, $0.4
million and $2.3 million, respectively, and were spent primarily on production
equipment and leasehold improvements. 
These capital expenditures were financed by the proceeds from our
initial public offering and our financings. 
We have satisfied all bank loans. 
We have no current commitments for capital expenditures.

Business Overview

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

14

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We
primarily target fixed and mobile communications service providers and private
networks and enterprises that require high capacity connectivity.  To date, our products have been commercially
deployed in more than 50 countries by communications service providers,
including local telephone companies and cellular telephone service operators,
and large and medium corporate organizations. 
Cellular operators use our products to connect their cell sites or
switch locations and to provide backhaul. 
Fixed operators use our products as an integral part of their
high-capacity metropolitan ring and access networks.  Private networks and enterprise customers, which include
universities, financial institutions, corporate campuses, governments, and
hospitals, use our equipment for their internal data and telecommunications
needs.  We sell our products through a
direct sales force, systems integrators, distributors, resellers and original
equipment manufacturers.

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

Products

Our product
consists of a compact high-performance antenna, an outdoor unit, an indoor unit
and our SNMP-based proprietary network management software.  The antenna transmits and receives microwave
radio signals.  The outdoor unit
controls the power transmission, converts IF signals to RF signals, and
provides an interface between the antenna and the indoor unit.  The outdoor unit is enclosed in a compact
weather-proof enclosure, which is fastened to the antenna.   The antenna is mounted on a pole which is
typically mounted on a rooftop, poles or the side of a building.  The indoor unit is connected to the outdoor
unit by a standard coaxial cable.  The
indoor unit:

| | converts the
  transmission signals from digital to radio and vice versa;    
|- | -----------------------------------------------------------------------------
|  |                                                                              
| | processes
  and manages information transmitted to and from the outdoor unit;
|  |                                                                              
| | aggregates
  multiple transmission signals; and                              
|  |                                                                              
| | provides the
  physical interfaces to the wireline network.                  

An
antenna, an outdoor unit and an indoor unit comprise a terminal.  Two terminals are required to form a radio
link, which may extend across a distance of 30 miles and more.  The specific distance depends upon the
customers requirements, the modulation scheme chosen, the frequency utilized,
the available line of sight, local rain patterns and antenna size.  Each link can be controlled by our network
management software or can be interfaced to the management network system of
the communications service provider.  We
market our products under the name FibeAir.  The FibeAir products utilize multiple
modulation schemes, which increase the flexibility of our products by giving
service providers the ability to choose between increased range or increased
spectral efficiency.  The FibeAir family
includes the following products:

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

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

FibeAir
1500P.  The
FibeAir 1500P system provides 100 to 622 Mbps of transmission capacity over a
28/50/56 MHz channel using single or dual independent, hot swappable carriers
with optional cross-polar interference canceller (XPIC) mechanism.  Each carrier is equipped with a built-in
software configurable modem, allowing 16, 32, 128 or 256 QAM modulation schemes
for improved spectrum utilization.

15

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

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

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

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

Our
Solution

Our
wireless solutions possess the following capabilities:

| | High-Speed Communications.  Our products enable the delivery of
  full-duplex, high-speed Internet access and integrated data, video and voice
  communications at transmission speeds of 45, 100, 155, 311 and 622 Mbps, as
  compared to less than 10 Mbps attainable via commercially available DSL or
  cable or up to 16 Mbps attainable under commercially available
  point-to-multipoint systems.  Our
  products deliver fiber-like transmission quality with error rates of less
  than one error per ten trillion bits transmitted.                                                                                                                                                                                                                                                                                                                                        
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | Cost Effectiveness.  Our products avoid the high costs
  associated with the deployment of fiber optic networks, including the cost of
  digging up streets, and obtaining municipal permits and rights of way to lay
  fiber optic lines.  It is commonly
  estimated that digging costs for laying fiber optic lines in metropolitan
  areas are approximately $150 thousand per mile.  Our wireless products further reduce costs because, unlike
  fiber optic lines, our products can be redeployed and reused at a negligible
  cost as customer needs change.                                                                                                                                                                                                                                                                                                                  
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | Rapid Deployment and Time to Market.  Communications service providers can
  deploy our products and provide their business subscribers with broadband
  access within a matter of hours.  Our
  products are light-weight, compact and easy to install and maintain.  Our product set-up and configuration,
  including operating frequency channel, is determined by our proprietary
  management software.  This feature
  simplifies the installation process and reduces installation time.  Our products can be installed on rooftops,
  poles, or on the sides of buildings in a matter of hours, as compared to
  competing wireless products which may require days or weeks to deploy or
  fiber optic networks which may require months or years to deploy.  Rapid deployment enables service providers
  to roll out service to subscribers and generate revenues quickly.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | Multi-Protocol Options.  Our products work with the most common
  transmission standards used in communications networks around the world.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | Variety of Frequency Bands.  Service providers select the optimal
  available transmission frequency based on the rainfall intensity in the
  transmission area and the desired transmission range.  Regulators grant licenses to operate and
  provide communication services in various high frequency bands in each
  region.  The high-frequency bands are
  allocated by government licensing authorities for high-capacity transmissions
  in the metropolitan area.  Our
  products operate in the 6, 7, 8, 11, 13, 15, 18, 23, 26, 28, 29, 31, 32 and
  38 GHz high-frequency bands, the principal licensed high-frequency bands currently
  available for commercial use throughout the world.                                                                                                                                                                               

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| | Meet Multiple Regulatory Standards. We design our products to meet North
  American and European standards.  The
  European standards have been developed by the European Telecommunications Standards
  Institute, commonly referred to as ETSI, and have been adopted in most
  countries excluding those in North America. 
  With some minor modular modifications, any of our products originally
  assembled to comply with North American standards may be easily adapted by
  communications service providers for compliance with European standards and
  vice versa.  The international
  compatibility of our products makes them attractive to global communications
  service providers and equipment vendors that deploy communications networks
  in North American and international markets. 
  Global communications service providers and equipment vendors that
  invest significant time and effort in studying, testing and approving our
  products prior to their deployment in communications networks in North
  American or international markets may deploy our products on a more expedited
  basis in communications networks in the other markets as well.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | Modular Architecture. Our products contain plug-in hot swappable
  units that can easily be replaced or exchanged in the field.  Our modular product design enables us to
  standardize our manufacturing process cost efficiently and concurrently
  manufacture each product to satisfy the individual requirements of each
  service provider on an expedited basis. 
  It also enables service providers to easily adapt our products for use
  in different network environments. 
  For example, modularity enables service providers to easily change our
  products to support different communications protocols by simply replacing
  the relevant modular components.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | Integrated Multiple Access Design. By replacing a module in our basic product,
  a service provider can allocate the transmission capacity and physical
  interfaces over multiple transmission lines. 
  This unique feature substantially reduces the service providers costs
  by eliminating the need to purchase external equipment that would otherwise
  be needed for this purpose.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | Scalability and Flexibility.  We design our products to enable
  communications service providers to deploy them incrementally as demand for
  their services increases.  This allows
  the communication service providers to match capital outlays with subscriber
  growth.  Our customers can establish a
  wireless broadband network with a relatively low initial investment, in
  comparison to fiber optic lines, and later expand the geographic coverage
  area of their networks and increase the number of points that can be served
  on their networks as subscriber demand increases.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | High Reliability and Availability.  We design our products to match the
  reliability standard required by service providers, including 99.999%
  availability.  This means that our
  products maintain connectivity 99.999% of the time, corresponding to
  approximately five minutes of down time per year, even under adverse weather
  conditions.  This enables our
  customers to provide their subscribers with the same high availability as is
  offered by incumbent carriers using fiber optic networks.  In addition, our products can be
  configured to provide full redundancy by connecting two radio links over the
  same frequency channel.  This feature
  minimizes service interruptions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | Encryption.In
  the security area, we announced the first high-capacity wireless system to
  offer a built-in-DES-based encryption solution.  Our user-friendly EncryptAir solution has been validated by
  the National Institute of Standards and Technology (NIST).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

17

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| | Multiple Modulation Schemes.  The FibeAir product family utilizes
  multiple modulation schemes, including 16 QAM, 32 QAM, 128 QAM, and 256 QAM
  enabling broadband wireless service providers to choose between increased
  range, and increased spectral efficiency.               
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                       
| | Add  Drop Multiplexer (ADM).In 2002, we introduced the industrys first
  fixed wireless SONET/SDH system with a built-in add-drop-multiplexer.  The integrated FibeAir solution relieves
  network operators of the need to install a stand alone ADM at each backbone
  connection.

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

| | Extreme Weather Conditions.Our
  products may not operate optimally in certain extreme weather conditions, including
  severe rainfalls or hurricanes.                                                                                                                                                                                                                                                                                                                                                                            
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Line-of-Sight Limitations.  Because our products require a direct
  line-of-sight between antennas, service providers often install our products
  on rooftops of buildings and on other tall structures.  As a result, service providers must
  generally secure roof rights from the owners of each building or other
  structure on which our products are installed.  This may delay deployment and increase the installation cost of
  our products or cause service providers not to install broadband wireless
  equipment.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | Frequency Bands.  To operate our products, service providers must either have a
  license to operate and provide communications services in the optimal
  available transmission frequency, or acquire the right to do so from a
  licensee.  If a service provider is
  unable to secure such a license, it will not be able to operate and provide
  wireless communications services in the optimal transmission frequency.  This may deter a service provider from
  deploying a wireless network.                            

Network
Applications

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

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

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

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

18

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

Customer
Service and Support

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

Customers
and Markets

We began
selling our products commercially during the second half of 1998.  Our products are currently used by more than
100 customers in over 50 countries.

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

Our
principal end-user customers are cellular operators, fixed operators, and
private networks and enterprises, such as financial institutions, hospitals,
universities, corporations and governments. 
We currently focus on worldwide markets.  We target three principal applications for our products:

| | providing
  cellular operators with high capacity connectivity to support increases in
  subscribers, call sites, and data-rich applications for their cell sites
  and  switching locations;
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                              
| | providing
  connectivity among points in a ring, access formation, and ADSL backhaul; and                                                                                                    
|  |                                                                                                                                                                                              
| | providing
  connectivity within campuses of corporations or other organizations for their
  internal networks.                                                                               

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

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|Region                             |  | 2001  |   | 2002 |       | 2003 | 
|---------------------------------- |  | ----- | - | ---- | ----- | ---- | 
|                                   |  |       |   |      |       |      | 
|                                   |  |       |   |      |       |      | 
|North
  America                    |  | 38.30 | % |      | 19.70 | %    | 
|EMEA*                              |  | 53.00 | % |      | 63.00 | %    | 
|Asia-Pacific
  and Latin
  America |  | 8.70  | % |      | 17.30 | %    | 
|                                   |  |       |   |      |       |      | 

* Europe, Middle East, and Africa

Distribution
Channels

In 2003, we
sold our products through distributors, resellers, third party integrators and
original equipment manufacturers.

Direct
Sales

We
currently utilize a direct sales force to serve our worldwide customers.  Our direct sales force targets cellular and
fixed operators, distributors and resellers. 
Our direct sales force also helps us build long-term relationships with
actual and potential purchasers and end-users, 
whether they are direct customers or end-users.

Marketing
Efforts

The
principal goal of our marketing program is to educate existing and potential
customers about the capabilities and benefits of our products.  We are also committed to developing and
enhancing the awareness of our company and our products.  Our marketing efforts include advertising,
public relations and participation in industry trade shows and conferences.

Manufacturing and
Assembly

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

In addition
to our own manufacturing operations, we contract with third parties to
manufacture and assemble circuit boards and other components used in our
products and to assemble and test indoor units and outdoor units for us.  Each of these third parties is owned and
operated independently of us and does not exclusively provide services to
Ceragon.  In 2001, we entered into an
agreement with a manufacturer to assemble and test our indoor units for an
initial two year term.  At the end of
the initial two year term, this agreement automatically renews every twelve
months, unless terminated by either party six months prior to the end of any
such term.  This agreement has not been
terminated and has been automatically renewed in accordance with the terms
thereof.  In 2004, we entered into an
agreement with an additional third party to provide turnkey manufacturing
services to supplement our manufacturing line for certain of our indoor units.  At the end of an initial two-year term, this
agreement automatically renews every twelve months, unless terminated by either
party six months prior to the end of any such term.  We have also entered into two agreements with different third
parties for the manufacture and testing of our outdoor units.  See Item 5. Operating and Financial Review
and Prospects.

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

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Competition

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

We compete
with a number of U.S. and international wireless equipment providers that vary
in size and in the types of products and solutions they offer.  Our primary competitors are companies that
offer point-to-point wireless network solutions, including Stratex Networks,
Nera Telecommunications, Microwave Communications Division of Harris
Corporation, NEC, Marconi, SIAE, Siemens AG, Alcatel, L.M. Ericsson, as well as
several private companies currently in the startup stage, and a number of other
companies have developed or are developing products that compete with
ours.  We believe we compete principally on the basis of:

| | product performance, design, features and inter-operability;
|- | ------------------------------------------------------------
|  |                                                             
| | product quality and reliability;                            
|  |                                                             
| | price;                                                      
|  |                                                             
| | ability to deliver products on a timely basis; and          
|  |                                                             
| | technical support and customer service.                     

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

Intellectual
Property

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

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

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

Conditions
in Israel

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

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Economic
Conditions

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

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

Trade
Relations

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

Israel and
the European Union concluded a free trade agreement in July 1975 which
confers various advantages on Israeli exports to most European countries and
obligates Israel to lower its tariffs on imports from these countries over a
number of years.  In 1985, Israel and
the United States entered into an agreement to establish a free trade
area.  The free trade area has
eliminated all tariff and specified non-tariff barriers on most trade between
the two countries.  On January 1, 1993,
an agreement between Israel and the European Free Trade Association, known as
the EFTA, established a free-trade zone between Israel and EFTA nations.  In November 1995, Israel entered into a
new agreement with the European Union, which includes modified rules of origin
and other improvements, including providing for Israel to become a member of
the research and technology programs of the European Union.  In recent years, Israel has established
commercial and trade relations with a number of other nations, including
Russia, China, India, Turkey and other nations in Eastern Europe and Asia.

Israeli
Tax Considerations and Government Programs

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

Tax
Reform

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

22

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

| | Reduction of the tax rate levied on capital
  gains (other than gains deriving from the sale of listed securities) derived
  after January 1, 2003, to a general rate of 25% for both individuals and
  corporations. Regarding assets acquired prior to January 1,
  2003, the reduced tax rate will apply to a proportionate part of the gain, in
  accordance with the holding periods of the asset, before or after January 1,
  2003, on a linear basis;                                                                                                                                                                                                                                                              
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Imposition of Israeli tax on all income of
  Israeli residents, individuals and corporations, regardless of the
  territorial source of income, including income derived from passive sources
  such as interest, dividends and royalties;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Introduction of controlled foreign
  corporation (CFC) rules into the Israeli tax structure. Generally,
  under such rules, an Israeli resident who holds , directly or indirectly, 10%
  or more of the rights in a foreign corporation whose shares are not publicly
  traded (or which has offered less than 30% of its shares or any rights to its
  shares to the public), in which more than 50% of the rights are held directly
  or indirectly by Israeli residents, and a majority of whose income in a tax
  year is considered passive income, will be liable for tax on the portion of
  such income attributed to his holdings in such corporation, as if such income
  were distributed to him as a dividend;
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Imposition of capital gains tax on capital
  gains realized by Israeli individuals as of January 1, 2003, from the sale of
  shares of publicly traded companies on the Tel Aviv Stock Exchange and from
  the sale of shares of publicly traded Israeli companies on certain other stock
  exchanges (such gain was previously exempt from capital gains tax in Israel
  in certain cases). For information with respect to the applicability of
  Israeli capital gains taxes on the sale of our ordinary shares, see Israeli Capital Gains Tax on Sales of Shares
  below;                                                                                                                                            
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Introduction of a new regime for the
  taxation of shares and options issued to employees and officers (including
  directors); and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Introduction of tax at a rate of 25% on
  dividends paid by one Israeli company to another (which are generally not
  subject to tax), if the source of such dividend is income that was derived
  outside of Israel.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

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

The Law for
the Encouragement of Capital Investments, 1959, commonly referred to as the
Investments Law, provides that a proposed capital investment in eligible
facilities may, upon application to the Investment Center of the Ministry of
Industry, Trade and Labor of the State of Israel, be designated as an approved
enterprise. The Investments Law will expire on October 30, 2004, unless its
terms will be extended.  Accordingly,
requests for new programs or expansions that are not approved on or before June
30, 2004 will not confer any tax benefits, unless the term of the law will be
extended. Each certificate of approval for an approved enterprise relates to a
specific investment program delineated both by its financial scope, including
its capital sources, and by its physical characteristics, for example, the
equipment to be purchased and utilized under the program.  The tax benefits derived from any
certificate of approval relate only to taxable income attributable to the
specific approved enterprise.  If a
company has more than one approval or only a portion of its capital investments
is approved, its effective tax rate is the result of a weighted average of the
applicable rates.

Taxable
income of a company derived from an approved enterprise is subject to company
tax at the maximum rate of 25%, rather than 36%, for the benefit period.  This period is ordinarily seven or ten years
depending upon the geographic location of the approved enterprise within
Israel, and whether the company qualifies as a foreign investors company as
described below, commencing with the year in which the approved enterprise
first generates taxable income. 
However, this period is limited to twelve years from commencement of
production or fourteen years from the date of approval, whichever is earlier. Tax benefits under the Investments Law
shall also apply to income generated by a company from the grant of a usage
right with respect to know-how developed by the Approved Enterprise, income
generated from royalties, and income derived from a service which is auxiliary
to such usage right or royalties, provided that such income is generated within
the Approved Enterprises ordinary course of business.

23

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A company
owning an approved enterprise may elect to forego certain government grants
extended to Approved Enterprise in return for an alternative package of
benefits.  Under the alternative package
of benefits, a companys undistributed income derived from an approved
enterprise will be exempt from company tax for a period of between two and ten
years from the first year of taxable income, depending on the geographic
location of the approved enterprise within Israel, and the company will be
eligible for a reduced tax rate for the remainder of the benefits period.

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

Subject to
applicable provisions concerning income under the alternative package of
benefits, all dividends paid by a company are considered to be attributable to
the entire enterprise and their effective tax rate is the result of a weighted
average of the various applicable tax rates. 
Under the Investments Law, a company that has elected the alternative
package of benefits is not obliged to distribute exempt retained profits, and
may generally decide from which years profits to declare dividends.  We currently intend to reinvest any income
derived from our approved enterprise programs and not to distribute the income
as a dividend.  In the event that we pay
a cash dividend from income that is derived from our Approved Enterprise and,
thus, is tax exempt, we would be required to pay tax at the rate which would
have been applicable had we not elected the alternative package of benefits
(generally 10%-25%, as described above), and to withhold 15% at the source for
the dividend recipient, on the amount distributed and the corporate tax
thereon.

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

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

24

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

The
Government of Israel encourages research and development projects through the
Office of Chief Scientist of the Israeli Ministry of Industry, Trade and Labor,
or the Office of the Chief Scientist, pursuant to the Law for the Encouragement
of Industrial Research and Development, 1984, and the regulations promulgated
thereunder, commonly referred to as the R&D Law.  Grants received under such programs are repaid through a
mandatory royalty based on revenues from products incorporating know-how
developed with the grants. This government support is condition upon our
ability to comply with certain applicable requirements and conditions specified
in the Office of the Chief Scientists program and with the provisions of the
R&D Law.

Under the
R&D Law, research and development programs that meet specified criteria and
are approved by the research committee of the Office of the Chief Scientist are
eligible for grants of up to 50% of certain approved expenditures of such
programs, as determined by the research committee.

In
exchange, the recipient of such grants is required to pay the Office of the
Chief Scientist royalties from the revenues derived from products incorporating
know-how developed within the framework of each such program or derived from
such program (including ancillary services in connection with such program),
usually up to an aggregate of 100% of the dollar-linked value of the total
grants received in respect of such program, plus interest. The royalty rates applicable
to our programs range from 3% to 3.5%, and as of 2004, the royalty rate is
3.5%.

The R&D
Law generally requires that the product developed under a program be
manufactured in Israel. However, upon the approval of the Chief Scientist, some
of the manufacturing volume may be performed outside of Israel, provided that
the grant recipient pays royalties at an increased rate, which may be
substantial, and the aggregate repayment amount is increased to 120%, 150% or
300% of the grant, depending on the portion of the total manufacturing volume
that is performed outside of Israel, unless the Chief Scientist grants a
special ruling allowing such foreign manufacture without increased royalties.
Effective April 1, 2003, the R&D Law also allows for the approval of grants
in cases in which the applicant declares that part of the manufacturing will be
performed outside of Israel or by non-Israeli residents and the research
committee is convinced that doing so is essential for the execution of the
program.  This declaration will be a
significant factor in the determination of the Office of Chief Scientist
whether to approve a program and the amount and other terms of benefits to be
granted.  For example, the increased royalty
rate and repayment amount will be required in such cases.

The R&D
Law also provides that know-how developed under an approved research and
development program may not be transferred to third parties in Israel without
the approval of the research committee. 
Such approval is not required for the export of any products resulting
from such research or development. The R&D Law further provides that the
know-how developed under an approved research and development program may not
be transferred to any third parties outside Israel.

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

25

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The funds
available for Office of the Chief Scientist grants out of the annual budget of
the State of Israel have been reduced in the past and may be further reduced in
the future.  We cannot predict whether,
if at all, we would be entitled to any future grants or the amounts of any such
grants.

Tax
Benefits and Grants for Research and Development

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

| | the
  expenditures are approved by the relevant Israeli government ministry,
  determined by the field of research;
|- | -------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                    
| | the research
  and development is for the promotion or development of the company; and                             
|  |                                                                                                                    
| | the research
  and development is carried out by or on behalf of the company seeking the
  deduction.              

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

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

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

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

| | deduction of
  purchases of know-how and patents 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 or after January 1,
  2003, on a recognized stock exchange outside of Israel;
|  |                                                                                                                                                                                                                                  
| | the right to
  elect, under specified conditions, to file a consolidated tax return with
  additional related Israeli industrial companies; and                                                                                  
|  |                                                                                                                                                                                                                                  
| | accelerated
  depreciation rates on equipment and buildings.                                                                                                                                                                     

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

26

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

Special
Provisions Relating to Taxation under Inflationary Conditions

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

| |  | When the
  value of a companys equity, as calculated under the Inflationary Adjustments
  Law, exceeds the depreciated cost of Fixed Assets (as defined in the
  Inflationary Adjustments Law), a deduction from taxable income is permitted
  equal to the excess multiplied by the applicable annual rate of inflation.  The maximum deduction permitted in any
  single tax year is 70% of taxable income, with the unused portion permitted
  to be carried forward.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | If the
  companys depreciated cost of Fixed Assets exceeds its equity, then the
  excess multiplied by the applicable annual rate of inflation is added to
  taxable income.                                                                                                                                                                                                                                                                                            
|  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | Subject to
  specified limitations, depreciation deductions on Fixed Assets and losses
  carried forward are adjusted for inflation based on the increase in the
  consumer price index.                                                                                                                                                                                                                                                                                 
|  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | Taxable
  gains on certain traded securities, which are taxed at a reduced tax rate for
  individuals following the Tax Reform, are taxable at the Corporate Tax
  (currently 36%) rate in specified circumstances.                                                                                                                                                                                                                                                      

However,
the Minister of Finance may, with the approval of the Knesset Finance
Committee, determine by order, during a certain fiscal year (or until February
28th of the following year) in which the rate of increase of the
price index would not exceed or shall not have exceeded, as applicable, 3%,
that all or some of the provisions of this Law shall not apply to such fiscal
year, or, that the rate of increase of the price index relating to such fiscal
year shall be deemed to be 0%, and to make the adjustments required to be made
as a result of such determination.

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

27

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Organizational Structure

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

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

Property,
Plants and Equipment

Our
corporate headquarters and principal administrative, finance, sales and
marketing, R&D, operations, and manufacturing departments are located at a
leased facility of approximately 55,000 square feet in Tel Aviv, Israel.  The leases for this space are valid until
May 2005, with options to renew for two additional one-year periods.

In December
2000, we entered into a five-year lease for approximately 52,110 square feet in
Tel Aviv.  In 2001, we entered into a
two-year sublease of this space to an unrelated third party, which was amended
in 2003 and extended in part until July 2004. 
In 2003, we entered into an early termination agreement with the
landlord pursuant to which we paid the landlord a cash amount of $731,660 and
issued 64,654 restricted ordinary shares pursuant to a share issuance agreement
in full settlement of any and all outstanding monies due and owing for early
termination.  The early termination was
effective as of December 15, 2003 and the landlord has assumed all obligations
under the sublease.

In
the United States, we lease approximately 4,156 square feet in Paramus, New
Jersey, for our North American headquarters, which is valid until September
2008. In the United Kingdom, we lease approximately 2,560 square feet in Birmingham
expiring in March 2015.  We also lease
space for our local subsidiaries to conduct sales and marketing activities in
France, Hong Kong, Brazil, Mexico, Singapore, and India.

ITEM
5.          OPERATING AND
FINANCIAL REVIEW AND PROSPECTS

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

Overview

We design,
develop, manufacture and sell high-capacity broadband wireless network
equipment for cellular operators, fixed operators and private networks and
enterprises.

We were
incorporated and commenced operations in July 1996.  We began selling our products in the second half of 1998.  Before that time, our operations consisted
primarily of research and development. 
Through December 2003, relatively few customers have accounted for a
large percentage of our revenues.  We
conduct our international sales and marketing activities through eight
wholly-owned subsidiaries.

28

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

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

Revenues.  We generate revenues from the sale of our
products.  We recognize revenues from
the sale of our products in accordance with SEC Staff Accounting Bulletin
Number 104.  We price our products on a
per unit basis and primarily grant discounts based upon unit volumes.  We sell our products directly and through
distribution channels worldwide.  In
2003, approximately 26.90% of our revenues were generated in North America,
59.50% were generated in Europe, Middle East, and Africa and 13.60% were
generated in the Asia-Pacific and Latin American regions.  The companys accounting policy complies
with the revenue determination requirements in EITF 00-21, (which was issued
during 2003), relating to the separation of multiple deliverables into
individual accounting units with determinable fair values.  The company considers the sale of equipment
and its installation to be two separate accounting units of the arrangement and
only defers the fair value of the installation services (but not less than the
amount contingent upon completion of installation/acceptance, if any) to the
period in which such installation occurs.

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

Research
and Development Expenses.Our
research and development expenses consist primarily of compensation and related
costs for research and development personnel, subcontractors costs, costs of
materials and depreciation of equipment. 
All of our research and development costs are expensed as incurred.  Research and development expenses are offset
by royalty-bearing grants from the Chief Scientist.  We believe continued investment in research and development is
essential to attaining our strategic objectives.

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

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

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

As a result
of options granted through December 31, 2003, we were required to recognize
under U.S. GAAP a total charge for amortization of deferred stock compensation
of approximately $22.8 million.  As of
December 31, 2003, we have a remaining balance of approximately $0.4 million,
which we expect to recognize during the years of 2004 and 2005.

Restructuring
and Non-Recurring Expenses (Income), Net.  Restructuring and non-recurring expenses
(income), net reflects income from the sales of raw materials to incidental
customers, expenses in regard to an early termination of one of the lease
obligations and income from the reversal of an excess allowance from last
years restructuring and non-recurring expenses.

29

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

Other
Financial ExpensesNon-Cash Charge Relating to Puttable Warrant.  In May 2003, the FASB issued FAS 150, which
established standards for how an issuer of financial instruments classifies and
measures certain financial instruments with characteristics of both liability
and equity.  The company adopted FAS 150
and as a result recorded a non-cash chargerelating to a puttable
warrant.

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

Results of Operations

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

|                                                                                |  | 2001 |        | 2002 |  | 2003  |   
|------------------------------------------------------------------------------- |  | ---- | ------ | ---- |  | ----- | --
|                                                                                |  |      |        |      |  |       |   
|                                                                                |  |      |        |      |  |       |   
|Revenues                                                                        |  |      | 100.0  | %    |  | 100.0 | % 
|Cost of
  revenues                                                              |  |      | 182.2  |      |  | 69.6  |   
|                                                                                |  |      |        |      |  |       |   
|Gross profit
  (loss)                                                           |  |      | (82.2  | )    |  | 30.4  |   
|                                                                                |  |      |        |      |  |       |   
|                                                                                |  |      |        |      |  |       |   
|Operating
  expenses                                                            |  |      |        |      |  |       |   
|Research
  and development                                                      |  |      | 52.2   |      |  | 49.7  |   
|Less:
  Grants and participations                                               |  |      | 10.7   |      |  | 10.2  |   
|                                                                                |  |      |        |      |  |       |   
|Research
  and development, net                                                 |  |      | 41.5   |      |  | 39.5  |   
|Selling
  and marketing, net                                                    |  |      | 48.0   |      |  | 49.6  |   
|General
  and administrative                                                    |  |      | 23.2   |      |  | 11.0  |   
|Amortization
  of deferred stock
            compensation (a)                   |  |      | 25.9   |      |  | 16.2  |   
|Restructuring
  and non-recurring expenses
        (income), net                |  |      | 19.1   |      |  | 0.5   |   
|                                                                                |  |      |        |      |  |       |   
|Total
  operating expenses                                                      |  |      | 157.7  |      |  | 116.8 |   
|                                                                                |  |      |        |      |  |       |   
|Operating
  loss                                                                |  |      | (239.9 | )    |  | (86.4 | ) 
|Financial
  income, net                                                         |  |      | 11.2   |      |  | 8.3   |   
|Other
  financial expenses--non-cash charge
       relating to puttable warrant |  |      | --     |      |  | --    |   
|                                                                                |  |      |        |      |  |       |   
|Net loss                                                                        |  |      | (228.7 | )%   |  | (78.1 | )%
|                                                                                |  |      |        |      |  |       |   

30

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

|                                                    |  | 2001 |   | 2002 |      | 2003 | 
|--------------------------------------------------- |  | ---- | - | ---- | ---- | ---- | 
|                                                    |  |      |   |      |      |      | 
|                                                    |  |      |   |      |      |      | 
|Cost of
  revenues                                  |  | 1.6  | % |      | 1.2  | %    | 
|Research and
  development expenses                 |  | 9.0  | % |      | 5.2  | %    | 
|Selling and
  marketing expenses                    |  | 8.0  | % |      | 5.8  | %    | 
|General and
  administrative expenses               |  | 7.2  | % |      | 4.0  | %    | 
|                                                    |  |      |   |      |      |      | 
|Total
  amortization of deferred stock compensation |  | 25.9 | % |      | 16.2 | %    | 
|                                                    |  |      |   |      |      |      | 

Years Ended December 31, 2002 and 2003

Revenues.Revenues increased
from $18.4 million for the year ended December 31, 2002 to $34.4 million for
the year ended December 31, 2003, an increase of $16.0 million, or 87.1%.  Quarterly revenues increased sequentially during
2003 from $7.0 million in the first quarter to $10.2 million in the fourth
quarter.  This increase was attributable
primarily to increased sales to fixed and cellular operators and private
networks and to customers in diversified geographic markets.

Cost
of Revenues. 
Cost of revenues increased from $12.8 million for the year ended
December 31, 2002 to  $20.6 million
for the year ended December 31, 2003, an increase of $7.8 million, or
61.4%.  This increase was attributable
primarily to increased materials consumed in connection with our increased
revenues.

Gross
profit (loss) as a percentage of revenues increased from 30.4% for the year
ended December 31, 2002 to 40.1% for the year ended December 31, 2003.  This increase was attributable primarily to
increased revenues while maintaining stable fixed costs.

Research
and Development Expenses, Net.  Our gross research and development expenses
decreased from $9.1 million for the year ended December 31, 2002 to $8.9
million for the year ended December 31, 2003, a decrease of $0.2 million, or
2.1%.  Our net research and development
expenses decreased from $7.3 million for the year ended December 31, 2002 to
$7.0 million for the year ended December 31, 2003, or 4.1%.  The decrease in our gross research and development
expenses was attributable primarily to a decrease in material purchases,
subcontractor expenses, and research and development equipment
depreciation.  This decrease was
partially offset by an increase of payroll expenses.  During the year ended December 31, 2003, we recognized $2.0
million in research and development grants from the Office of the Chief
Scientist, compared to $1.9 million during the year ended December 31, 2002.

Selling
and Marketing Expenses, Net.Selling
and marketing expenses, net increased from $9.1 million for the year ended
December 31, 2002 to $9.4 million for the year ended
December 31, 2003, an increase of $0.3 million, or 3.4%.  This increase was attributable primarily to
an increase in payroll expenses.

General
and Administrative Expenses.General
and administrative expenses increased nominally from $2.0 million for the year
ended December 31, 2002 to $2.2 million for the year ended December 31, 2003,
an increase of $0.2 million, or 6.7%. 
This increase was attributable primarily to an increase in payroll
expenses and professional and consulting services.

Amortization
of Deferred Stock Compensation.Amortization
of deferred stock compensation decreased from $3.0 million for the year ended
December 31, 2002 to $1.4 million for the year ended December 31, 2003, a
decrease of $1.6 million, or 54.5%. 
This decrease was attributable primarily to an accelerated amortization
method used for the non-cash compensation expenses, which were mainly generated
in previous years.  Amortization of
deferred stock compensation includes non-cash compensation expenses related to
the cost of revenues of $0.2 million for the year ended December 31, 2002 and
$0.1 million for the year ended December 31, 2003; to research and development
expenses of $1.0 million for the year ended December 31, 2002 and $0.4 million
for the year ended December 31, 2003; to selling and marketing expenses of $1.1
million for the year ended December 31, 2002 and $0.5 million for the year ended
December 31, 2003; and to general and administrative expenses of $0.7 million
for the year ending December 31, 2003 and $0.3 million for the year ending
December 31, 2002.

31

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Restructuring
and Non-Recurring Expenses (Income), Net.Restructuring and non-recurring expenses
(income), net increased from $0.1 million for the year ended December 31, 2002
to $(0.7) million for the year ended December 31, 2003. The increase was attributable
primarily to a decrease in expenses in regard to an early termination of one of the lease
obligations and income from the reversal of an excess allowance from last years
restructuring and non-recurring expenses. This increase was partially offset by a decrease
in income from the sales of raw materials to incidental customers.

Financial
Income, Net.Financial
income, net decreased from $1.5 million for the year ended December 31, 2002 to
$1.2 million for the year ended December 31, 2003, a decrease of $0.3 million
or 20.0%.  This decrease was
attributable primarily to the decrease of the interest on marketable securities
and on bank deposits.

Other
Financial ExpensesNon-Cash Charge Relating to Puttable Warrant.  In May 2003, the FASB issued FAS 150, which
established standards for how an issuer of financial instruments classifies and
measures certain financial instruments with characteristics of both liability
and equity.

The
adoption of FAS 150 resulted in the company recording a puttable warrant, exercised by a supplier in 2003, at
fair value.

During 2003,
the company recognized a non-cash charge in the financial statements totaling
$3.4 million resulting from a change in the fair value of this puttable warrant.

Net
Loss.Net loss
decreased from $14.4 million for the year ended December 31, 2002 to $7.7
million for the year ended December 31, 2003, a decrease of $6.7 million, or
46.5%.

Years Ended December 31, 2001 and 2002

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

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

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

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

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

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

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Amortization
of Deferred Stock Compensation.Amortization
of deferred stock compensation decreased from $6.4 million for the year ended
December 31, 2001 to $3.0 million for the year ended December 31, 2002, a
decrease of $3.4 million.  Amortization
of deferred stock compensation includes non-cash compensation expenses related
to the cost of revenues of $0.4 million for the year ended December 31, 2001
and $0.2 million for the year ended December 31, 2002; to research and
development expenses of $2.2 million for the year ended December 31, 2001 and
$1.0 million for the year ended December 31, 2002; to selling and marketing
expenses of $2.0 million for the year ended December 31, 2001 and $1.1 million
for the year ended December 31, 2002; and to general and administrative expenses
of $1.8 million for the year ending December 31, 2001 and $0.7 million for the
year ending December 31, 2002.

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

Financial
Income, Net.Financial
income, net decreased from $2.8 million for the year ended December 31, 2001 to
$1.5 million for the year ended December 31, 2002, a decrease of $1.3 million,
or 46.4%.  This decrease was
attributable primarily to a decrease in our average cash balance throughout the
year.

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

Impact of Inflation and Currency Fluctuations

The dollar
cost of our operations is influenced by the extent that any inflation in Israel
is or is not offset, or is offset on a lagging basis, by the devaluation of the
NIS in relation to the dollar.  When the
rate of inflation in Israel exceeds the rate of devaluation of the NIS against
the dollar, companies experience increases in the dollar cost of their
operations in Israel.  Unless offset by
a devaluation of the NIS, inflation in Israel will have a negative effect on
our results.

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

| | Year ended
  December 31, |  | Israeli
  inflation
  rate % |  | NIS
  devaluation rate % | 
| | ------------------------- |  | ---------------------------- |  | ------------------------ | 
| |                           |  |                              |  |                          | 
| |                           |  |                              |  |                          | 
| | 1999                      |  | 1.3                          |  | (0.1)                    | 
| | 2000                      |  | 0.0                          |  | (2.7)                    | 
| | 2001                      |  | 1.4                          |  | 9.3                      | 
| | 2002                      |  | 6.5                          |  | 7.3                      | 
| | 2003                      |  | (1.9)                        |  | (7.6)                    | 

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

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

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

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

Liquidity and Capital Resources

Since our
inception, we have financed our operations primarily through private placements
of convertible debentures and preferred shares, royalty-bearing grants from the
Chief Scientist, borrowing from a related party, and from proceeds of our
initial public offering on the Nasdaq National Market in August 2000.  Through December 31, 2000, we raised $97.8
million in the initial public offering and an additional $35.2 million from
three private placements all of which in the aggregate amount to a total of
$133.0 million.  We did not raise any
capital during the fiscal years 2002 and 2003. Through December 31, 2003, we
received a total of approximately $12.9 million from the Chief Scientist.  Prior to fiscal year 2000, we borrowed
approximately $1.2 million from a related party, which we repaid in August 2000
from the initial public offering proceeds.

As of
December 31, 2003, we had approximately $39.0 million in cash and cash
equivalents, short and long-term bank deposits, and short and long-term
marketable securities.

In February
2000, the company received a line of credit from a bank in the amount of $6,000
for a period of 36 months.  As of
December 31, 2003, the line of credit has not been utilized.  In consideration for the line of credit, the
company registered a floating charge on all of its assets in favor of the
bank.  Subsequent to the balance sheet
date, the bank cancelled the floating charge.

Net cash
used in operating activities was approximately $24.1 million for the year ended
December 31, 2001, $10.0 million for the year ended December 31, 2002 and $4.9
million for the year ended December 31, 2003. 
The decrease in 2003 in net cash used in operating activities was
primarily attributable to increased revenues and cash control efforts which
were implemented as part of the companys expense reduction initiatives.

Net cash
provided by (used in) investing activities was $(39.5) million for the year
ended December 31, 2001, $8.2 million for the year ended December 31, 2002, and
$6.4 million for the year ended December 31, 2003.

Net cash
provided by (used in) financing activities was $(37) thousand for the year
ended December 31, 2001,  $33 thousand
for the year ended December 31, 2002, and $1.2 million for the year ended
December 31, 2003.

As of
December 31, 2003, our principal commitments consisted of $2.3 million for
obligations outstanding under non-cancelable operating leases and $10.8 million
of royalties payable to the Government of Israel on revenues from product
sales. We are also committed to pay royalties to a subcontractor for the
development of a component and its integration into one of our products.  The royalty rate on royalties payable to
this subcontractor decreases on an annual basis, at the rate of 4%, 3% and 2%
of our revenues for the first, second and third years of revenues,
respectively, and 1% of our revenues for the fourth to seventh years of
revenues.  This is the sixth year we
have received revenues as of December 31, 2003 and we currently pay royalties
to this subcontractor at a rate of 1% of our collected revenue for a specific
product.

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

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

Beginning
as of April 30, 2003 and expiring on October 31, 2004, the puttable warrant was
exercisable for cash (in whole but not in part) payable in 6 equal monthly
payments of $145,833.33.  Beginning as
of September 30, 2003, the puttable warrant was exercisable (in whole but not in part)
together with a cash payment of $0.003 per share, or by a cashless exercise
purchase, for 700,000 restricted Ordinary Shares.  Resale of Ordinary Shares by the supplier issued upon exercise of
the puttable warrant were subject to Rule 144 under the Securities Act of 1933, as
amended.  The puttable
warrant was exercised by a cashless exercise into 699,624 shares in 2003 and
the supplier subsequently sold the shares.

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

In October
2003, we entered into an early termination agreement with a landlord of a
secondary property leased in 2000, pursuant to which we paid the landlord a
cash amount of $731,660and issued
64,654 restricted ordinary shares pursuant to a share issuance agreement, in
full settlement of any and all outstanding monies due and owing for early
termination.  The early termination was
effective as of December 15, 2003.

Our cash
investments are comprised of the following: 19% consist of short term, highly
liquid investments with original maturities of less than three months, and 39%
consist of short term deposits and marketable securities with original
maturities of up to 1 year, with a minimum average credit rating of at least
A1/P1.  The remaining balance of our assets are
invested in corporate debt securities and in bank deposits with maturities of
up to 3 years, carrying a minimum rating of AA-/AA3.  All of these investments are in US dollars.

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

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

Capital Expenditures

We have no
current material commitments for capital expenditures.

Research and Development

We place
considerable emphasis on research and development to expand the capabilities of
our existing products, to develop new products and to improve our existing
technologies and capabilities.  We
believe that our future success will depend upon our ability to maintain
technological leadership, to enhance existing products and to introduce on a
timely basis new commercially viable products and technology addressing the
needs of our customers.  We intend to
continue to devote a significant portion of our personnel and financial
resources to research and development. 
As part of our product development process, we seek to maintain close
relationships with our customers to identify market needs and to define
appropriate product specifications.  In
addition, we intend to continue to comply with industry standards and, in order
to participate in the formulation of European standards, we are full members of
the European Telecommunications Standards Institute.

35

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Our
research and development activities are conducted at our facilities in Tel
Aviv, Israel.  As of December 31, 2003,
our research and development staff consisted of 81employees.  Our research and development team includes
highly specialized engineers and technicians with expertise in the fields of
millimeter wave design, modem and signal processing, data communications,
system management and networking solutions. 
Our technical expertise in these fields results in a highly-optimized
system design and a strong and reliable system solution.  Our extensive protocol knowledge and expertise
has resulted in highly optimized solutions for various communications
protocols.

Intellectual Property

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

Trend Information

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

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

As a result
of these strategic decisions, our revenues from cellular operators increased
from $1.1 million in 2001 to $12.3 million in 2003.  In addition, in 2003 our revenues increased sequentially quarter
by quarter, together with our gross margins. 
Our revenues from fixed operators have also increased during this
period.  We have seen pressure on our
resale prices in light of increased competition, together with an enhanced
focus by our customers on reducing their capital expenditures.  Such price pressure may have an impact on
our results of operations.

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

As we
continue to expand our geographic footprint, we are increasingly engaged in
supplying turnkey solutions for our customers, often in developing
nations.  We act as prime contractor and
equipment supplier for these projects and provide transportation, installation,
testing, maintenance and various other services required for these
projects.  We typically bear the risks
of loss and damage and title to our products until the customer has issued an
acceptance certificate upon successful completion of rigorous acceptance
tests.  If our products are damaged or
stolen, or if the products do not pass the acceptance tests, the customer could
refuse to pay us and we would incur substantial costs, including fees owed to
our subcontractors, increased insurance premiums, transportation costs, and expenses
related to manufacturing the products. 
We would be unable to recognize any revenue generation from such
projects in the event of such contingencies. 
Moreover, in such a case, we may not be able to repossess the equipment,
thus, suffering additional losses.

Off Balance Sheet Arrangements

We have no
off balance sheet arrangements.

36

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Tabular Disclosure of Contractual Obligations

|                            |  | Payments
  due by period |           
|--------------------------- |  | ------------------------ | ----------
|                            |  |                          |           
|Contractual Obligations     |  | Total                    |           
|                            |  |                          |           
|Operating Lease Obligations |  | $                        | 2,294,000 
|Purchase
  Obligations      |  | $                        | 13,990,000
|Total                       |  | $                        | 16,284,000

Critical
Accounting Policies

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

In
many cases, the accounting treatment of a particular transaction is
specifically dictated by U.S. GAAP and does not require managements judgment
in its application.  There are also
areas in which managements judgment in selecting among available alternatives
would produce a materially different result. 
The Companys management has reviewed these critical accounting policies
and related disclosures with the Audit Committee.  See Note 2 to our Consolidated Financial Statements, which
contains additional information regarding our accounting policies and other
disclosures required by U.S. GAAP.

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

| |  | Revenue recognition;                
|- |  | ------------------------------------
| |  | Provision for doubtful accounts; and
| |  | Inventory valuation                 

Revenue
recognition.We recognize revenue in accordance with SEC Staff
Accounting Bulletin No. 104, which is commonly referred to as SAB 104, when
persuasive evidence of an arrangement exists, delivery has occurred, the fee is
fixed or determinable and collectibility is probable.  When a right of return exists, we defer revenues until the right
of return expires.  When no right of
return exists or once such right of return expires our sales are final and the
only option in the event of a non-conformity of products with the warranty is
repair or replacement of the non-conforming products.  In contracts for which acceptance procedures are required by the
customer, we defer recognition of such revenues until receiving the acceptance
confirmation from the customer.  Our
typical product warranty is between 18 to 36 months at no extra charge.  We accrue for other allowances based on our
historical experience.

Provision for doubtful
accounts.We perform regular
credit evaluations of our customers financial condition.  Allowance for doubtful accounts is computed
for specific debts, the collectibility of which is doubtful, based on the
companys experience.  In addition, we
include a general provision for doubtful debts based on the age of the debts
and on managements past experience in collecting such receivables.

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

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ITEM
6.          DIRECTORS, SENIOR
MANAGEMENT AND EMPLOYEES

Directors and Senior Management

MANAGEMENT

The
following table lists our current directors and executive officers:

|Name                    |  | Age |  | Position                                                  | 
|----------------------- |  | --- |  | --------------------------------------------------------- | 
|                        |  |     |  |                                                           | 
|                        |  |     |  |                                                           | 
|Zohar
  Zisapel         |  | 55  |  | Chairman of
  the Board of Directors                      | 
|Shraga Katz             |  | 51  |  | Chief
  Executive Officer, President and Director         | 
|Ran Oz                  |  | 37  |  | Chief
  Financial Officer                                 | 
|Shlomo
  Tenenberg      |  | 49  |  | Executive
  Vice President, Worldwide Marketing and Sales | 
|Gil Feingold            |  | 44  |  | Executive
  Vice President, Worldwide Operations          | 
|Udi Gordon              |  | 37  |  | Vice
  President, Research and Development                | 
|Sharon Ganot            |  | 35  |  | Vice
  President, Human Resources                         | 
|Mitchell C.
  Shelowitz |  | 38  |  | General
  Counsel and Corporate Secretary                 | 
|David Ackerman          |  | 47  |  | President of
  our U.S. subsidiary                        | 
|Yael Langer             |  | 39  |  | Director                                                  | 
|Zohar Gilon             |  | 56  |  | Director                                                  | 
|Shmuel Levy             |  | 50  |  | Director                                                  | 
|Joseph
  Atsmon         |  | 54  |  | Director                                                  | 

Zohar
Zisapelhas served as the chairman of our board of
directors since we were incorporated in 1996. 
Mr. Zisapel is also a founder and a director of RAD Data Communications
Ltd., of which he served as president from January 1982 until January 1998 and
has served as chairman since 1998.  Mr.
Zisapel serves as a director of RIT Technologies Ltd., Verisity Ltd., and
several other private companies, and as chairman of RADVision Ltd. and RADCOM
Ltd.  Mr. Zisapel previously served as
head of the electronics research department in the Israeli Ministry of
Defense.  Mr. Zisapel received a B.Sc. and
an M.Sc. in electrical engineering from the Technion, Israel Institute of
Technology and an M.B.A. from Tel Aviv University.

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

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

Shlomo
Tenenberghas served as our executive vice president
of worldwide marketing and sales since October 2002.  From July 1998 until October 2002, he served as our vice
president of marketing and sales.  From
March 1994 to July 1998, Mr. Tenenberg served as the vice president of Nexus
Telocation Systems Ltd.  From October
1989 until March 1994, Mr. Tenenberg was the marketing manager at ECI Telecom
Ltd.  Mr. Tenenberg received a B.Sc. in
electrical engineering and electronics from Ben Gurion University and an M.B.A.
from Tel Aviv University.

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

Udi
Gordon
has served as our vice president of research and development since July 2003.  From 1997 until June 2003, he served as a
senior manager in our research and development department.  From 1990 until 1997, Mr. Gordon served in
the electronic research and development department in the Israeli Ministry of
Defense.  Mr. Gordon received a B.Sc. in
electrical engineering from the Technion, Israel Institute of Technology (cum
laude), and a Masters degree in management science from Bar-Ilan University.

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

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

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

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

Zohar
Gilonhas served as a director of our company since
June 1999.  Mr. Gilon is a general
partner and managing director of Tamar Technologies L.P., a venture capital
fund based in Israel, which was founded in 1998 together with C.E. Unterberg,
Towbin.  Mr. Gilon is a private
entrepreneur and has served as a director of AVT-Advanced Vision Technology
Ltd. since 1998, as well for companies in the RAD-BYNET group, including RADCOM
Ltd. since September 1995, RIT Technologies Ltd., since September 1995, and
Silicom Ltd. from 1995 until 2003. 
Between November 1993 and June 1995, Mr. Gilon served as president of
W.S.P. Capital Holdings, an investment firm traded on the Tel Aviv Stock Exchange.  Mr. Gilon received a B.S.E.E. from the
Technion, Israel Institute of Technology, and an M.B.A. from Tel Aviv
University.  Mr. Gilon is one of our
external directors under Israeli law and is one of our independent directors
under Nasdaq rules.

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

39

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Joseph
Atsmonhas served as a director since July 2001. He
currently serves as a director of Nice Ltd., a position he has held since July
2001.   From April 2001 until October
2002, he served as Chairman of Discretix Ltd. 
From 1995 until 2000, he served as chief executive officer of Teledata
Communications Ltd., a public company acquired by ADC Telecommunications Inc.
in 1998.  From 1986 until 1995, Mr.
Atsmon served in various positions at Tadiran Ltd., among them a division
president and corporate vice president for business development.  Mr. Atsmon received a B.Sc. in Electrical
Engineering, summa cum laude,
from the Technion, Israel Institute of Technology.  Mr. Atsmon is one of our independent directors under Nasdaq rules
and is our audit committee financial expert.

Compensation of Directors and Executive
Officers

The
following table presents all compensation we paid to all of our directors and
executive officers as a group for the year ended December 31, 2003.  The table does not include any amounts we
paid to reimburse any of our affiliates for costs incurred in providing us with
services during this period.

|                                                                                    |  | Salaries, fees,
  commissions
  and bonuses |  | Pension,
  retirement and
  other similar
  benefits | 
|----------------------------------------------------------------------------------- |  | ------------------------------------------- |  | ---------------------------------------------------- | 
|                                                                                    |  |                                             |  |                                                      | 
|All
  directors and executive officers as a group, consisting of   thirteen persons |  | $  910,000                                  |  | $  160,000                                           | 

As
of December 31, 2003, our directors and executive officers as a group,
consisting of thirteen persons, held options to purchase an aggregate of
2,750,700 ordinary shares.  All our
officers work full time.

Other than
reimbursement for expenses, and the award of stock options, we do not
compensate our directors for serving on our board of directors.  For more information, please see Affiliate
Employees Option Plan below and Note 9 to our Consolidated Financial
Statements included as Item 18 in this annual report.

Board Practices

Board
of Directors

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

The board
may make a resolution when a quorum is present, and each resolution must be
passed by a vote of at least a majority of the directors present at the meeting.  A quorum of directors is at least a majority
of the directors then in office.  The
board may elect one director to serve as the chairman of the board of directors
to preside at the meetings of the board of directors, and may also remove such
director as chairman.  Minutes of the
meetings are recorded and kept at our offices.

Terms
of Directors

Our
articles of association provide that directors, other than our external
directors described below, are elected at our annual general meeting of
shareholders by a vote of the holders of a majority of the voting power
represented at that meeting.  Each of
these directors holds office until the next annual general meeting of the
shareholders.  Our
external directors, as further described below, each serve a three year
term.

In the
event that any directors are appointed by the board of directors, their
appointment must be ratified by the shareholders at the next shareholders
meeting following the appointment.  Our
shareholders may remove a director from office, in certain circumstances.  There is no requirement that a director own
shares of our company.  Directors may
appoint alternative directors in their stead.

40

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As a company organized in Israel whose ordinary
shares are listed for quotation on the Nasdaq National Market we are required
to comply with the rules of the U.S. Securities and Exchange Commission and the
Nasdaq National Market applicable to listed companies and the Israeli Companies
Law, 5759-1999 (the Companies Law) applicable to Israeli companies.  Under Nasdaq National Market Rules, we are
required to appoint three independent directors and, under the Israeli
Companies Law, we are required to appoint two external directors.

Independent
Directors

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

External
Directors

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

| |                                 | the company;                                                            
| | -------------------------------- | ------------------------------------------------------------------------
| |                                  |                                                                         
| |                                 | any entity
  controlling the company; or                                
| |                                  |                                                                         
| |                                 | any entity
  controlled by the company or by this controlling entity.   
| |                                  |                                                                         
| | The term
  affiliation includes:
| |                                  |                                                                         
| |                                 | an
  employment relationship;                                           
| |                                  |                                                                         
| |                                 | a business
  or professional relationship maintained on a regular basis;
| |                                  |                                                                         
| |                                 | control; and                                                            
| |                                  |                                                                         
| |                                 | service as
  an office holder.                                          

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

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

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

Election
of External Directors

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

| | at least one
  third of the shares of non-controlling shareholders voted at the meeting,
  vote in favor of the election; or
|- | ----------------------------------------------------------------------------------------------------------------------------

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

The
initial term of an external director is three years and may be extended for an
additional three years.  External
directors can be removed from office only by the same majority of shareholders
that was required to elect them, or by a court (if they cease to meet the
statutory qualifications with respect to their appointment, or if they violate
their duty of loyalty to the company). Each committee of a companys board of
directors is required to include at least one external director, except for the
audit committee, which is required to include all external directors.  Zohar Gilon and Shmuel Levy were appointed
in 2001 as our external directors.  They
were reappointed in March 2004 and their terms will expire in March 2007.

Audit
Committee

Nasdaq
Requirements

Under
Nasdaq rules, we are required to have an audit committee consisting of at least
three independent directors, all of whom are financially literate and one of
whom has been determined by the board to be the audit committee financial
expert.  The responsibilities of the
audit committee under Nasdaq rules include evaluating the independence of a
companys outside auditors.  Currently,
Messrs. Zohar Gilon, Shmuel Levy, and Joseph Atsmon serve on our audit
committee, each of whom has been determined by the board to be
independent.  Mr. Atsmon is the audit
committee financial expert.

Companies
Law Requirements

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

| | the chairman
  of the board of directors;                                                           
|- | ----------------------------------------------------------------------------------------------------
|  |                                                                                                     
| | any
  controlling shareholder or any relative of a controlling shareholder; and                     
|  |                                                                                                     
| | any director
  employed by the company or who provides services to the company on a regular
  basis.

The role of
the audit committee is to identify irregularities in the management of the
companys business and to examine accounting, reporting, and financial control
practices, in consultation with the internal auditor and the companys
independent accountants, suggest appropriate courses of action to amend such
irregularities, and to exercise the powers of the board of directors with respect
to such practices.  In addition, the
approval of the audit committee is required under the Companies Law to effect
certain related-party transactions.

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

Approval
of Certain Transactions

The
approval of the audit committee is required under the Companies Law to effect
specified actions and exceptional transactions with office holders, third
parties in which an office holder has a personal interest and controlling
parties, and transactions with a third party in which a controlling party has a
personal interest.  A controlling
party is defined in the Companies Law for this purpose as a person with the
ability to direct the actions of a company, or a person who holds 25% or more
of the voting power in a public company if no other shareholder owns more than
50% of the voting power in the company, provided that two or more persons
holding voting rights in the company who each have a personal interest in the
approval of the same transaction shall be deemed to be one holder.

42

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The audit
committee may not approve an action or an exceptional transaction with an
interested party or with an office holder unless at the time of approval the
two external directors are serving as members of the audit committee and at
least one of them is present at the meeting in which an approval was
granted.  The Companies Law defines the
term interested party to include a person who holds 5% or more of the
companys outstanding share capital or voting rights, a person who has the
right to appoint one or more directors or the general manager, or any person
who serves as a director or as the general manager. Audit committee approval is
also required to approve the grant of an exemption from the responsibility for
a breach of the duty of care towards the company, or for the provision of
insurance or an undertaking to indemnify any office holder who is not a
director of the company.  In addition,
the audit committee must approve contracts between the company and any of its
directors relating to the service or employment of the director.

Remuneration
of Directors

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

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

Share
Incentive Committee

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

Option
Committee

Our option
committee, which consists of Zohar Zisapel and Shraga Katz, administers our
affiliate employees option plan.

Dividends

The board
may declare dividends as it views justified, but the final dividend for any
fiscal quarter must be proposed by the board and approved by the
shareholders.  Dividends may be paid in
assets or shares, debentures or debentures stock of our company or of other
companies.  For further information,
please see Financial Information  Dividends.

Internal
Auditor

Under the
Companies Law, the board of directors of a public company must appoint an
internal auditor proposed by the audit committee.  The duty of the internal auditor is to examine, among other
things, whether the companys conduct complies with applicable law, integrity
and orderly business procedure.  The
internal auditor has the right to demand that the chairman of the audit
committee convene an audit committee meeting, and the internal auditor may
participate in all audit committee meetings. 
Under the Companies Law, the internal auditor may not be an interested
party, an office holder or an affiliate, or a relative of an interested party,
an office holder or affiliate, nor may the internal auditor be the companys
independent accountant or its representative. 
We have appointed Gideon Duvshani, C.P.A., as our internal auditor.

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Fiduciary
Duties of Office Holders

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

| |  | information
  regarding the advisability of a given action submitted for his or her
  approval or performed by him or her by virtue of his or her position; and
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |  |                                                                                                                                                                
| |  | all other
  important information pertaining to these actions.                                                                                                 

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

| |  | refrain from
  any conflict of interest between the performance of his or her duties in the
  company and his or her personal affairs;                                       
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |  |                                                                                                                                                                              
| |  | refrain from
  any activity that is competitive with the company;                                                                                                            
|  |  |                                                                                                                                                                              
| |  | refrain from exploiting any business opportunity of the company to
  receive a personal gain for himself or herself or others; and                                           
|  |  |                                                                                                                                                                              
| |  | disclose to the company any information or documents relating to a
  companys affairs which the office holder has received due to his or her
  position as an office holder.

Approval
of Specified Related Party Transactions under Israeli Law

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

The company
may approve an action by an office holder from which the office holder would
otherwise have to refrain, as described above, if:

| | the office holder acts in good faith and the act or its approval does
  not cause harm to the company; and                                             
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                        
| | the office holder discloses the nature of his or her interest in the
  transaction to the company in a reasonable time before the companys
  approval.

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

Disclosure
of Personal Interests of an Office Holder

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

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

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

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

| | other than in the ordinary course of business;                                                   
|- | -------------------------------------------------------------------------------------------------
|  |                                                                                                  
| | otherwise than on market terms; or                                                               
|  |                                                                                                  
| | that is likely to have a material impact on the companys
  profitability, assets or liabilities.

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

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

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

Disclosure
of Personal Interests of a Controlling Shareholder

Under
the Companies Law, the disclosure requirements which apply to an office holder
also apply to a controlling shareholder of a public company.  A controlling shareholder includes for this
purpose a shareholder that holds 25% or more of the voting rights in a public
company if no other shareholder owns more than 50% of the voting rights in the
company, but excluding a shareholder whose power derives solely from his or her
position as a director of the company or any other position with the
company.  Extraordinary transactions
with a controlling shareholder or in which a controlling shareholder has a
personal interest, and the engagement of a controlling shareholder as an office
holder or employee, require the approval of the audit committee, the board of
directors and the majority of the voting power of the shareholders present and
voting at the general meeting of the company, provided that:

| | at least one-third of the shares of shareholders who have no personal
  interest in the transaction and who are present and voting (in person or by
  proxy or written ballot), vote in favor of the election; or
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                  
| | shareholders who have no personal interest in the transaction who
  vote against the transaction do not represent more than exceed one percent of
  the aggregate voting rights in the company.                  

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

Exculpation,
Insurance and Indemnification of Directors and Officers

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

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Office
Holders Insurance

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

| | a breach of his or her duty of care to us or to another person;                                                                                                                                   
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                   
| | a breach of his or her duty of loyalty to us, provided that the
  office holder acted in good faith and had reasonable cause to assume that his
  or her act would not prejudice our interests; or
|  |                                                                                                                                                                                                   
| | a financial liability imposed upon him or her in favor of another
  person.                                                                                                                       

Exculpation
and Indemnification of Office Holders

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

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

Our
articles of association also include the following:

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

Limitations
on Insurance and Indemnification

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

| | a breach by the office holder of his or her duty of loyalty unless the
  office holder acted in good faith and had a reasonable basis to believe that
  the act would not prejudice the company;
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                 
| | a breach by the office holder of his or her duty of care if the
  breach was done intentionally or recklessly;                                                                                  
|  |                                                                                                                                                                                                 
| | any act or omission done with the intent to derive an illegal
  personal benefit; or                                                                                                            
|  |                                                                                                                                                                                                 
| | any fine levied against the office holder.                                                                                                                                                      

46

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In
addition, under the Companies Law, indemnification of, and procurement of
insurance coverage for, our office holders must be approved by our audit
committee and our board of directors and, in specified circumstances, by our
shareholders.

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

Mergers
and Acquisitions under Israeli Law

The
Companies Law includes provisions that allow a merger transaction and requires
that each company that is a party to the merger have the transaction approved
by its board of directors and a vote of the majority of its shares, at a
shareholders meeting called on at least 21 days prior notice.  For purposes of the shareholder vote of each
party, unless a court rules otherwise, the merger will not be deemed approved
if a majority of the shares held by parties other than the other party to the
merger, or by any person who holds 25% or more of the shares or the right to
appoint 25% or more of the directors of the other party, vote against the
merger.  Upon the request of a creditor
of either party to the proposed merger, the court may delay or prevent the
merger if it concludes that there exists a reasonable concern that as a result
of the merger the surviving company will be unable to satisfy the obligations
of any of the parties to the merger.  In
addition, a merger may not be completed unless at least 70 days have passed
from the time that the requisite proposals for approval of the merger have been
filed with the Israeli Registrar of Companies by each merging company.

The Companies
Law also provides that an acquisition of shares in a public company must be
made by means of a tender offer if as a result of the acquisition the purchaser
would become a 25% or greater shareholder of the company.  This rule does not apply if there is already
another 25% or greater shareholder of the company.  Similarly, the Companies Law provides that an acquisition of
shares in a public company must be made by means of a tender offer if as a
result of the acquisition the purchaser would become a 45% or greater
shareholder of the company, unless there is already a majority shareholder of
the company.  In any event, if as a
result of an acquisition of shares the acquirer will hold more than 90% of a
companys shares, the acquisition must be made by means of a tender offer for
all of the shares of such class.  If
more than 95% of the outstanding shares are tendered in the tender offer, all
the shares that the acquirer offered to purchase will be transferred to it.  However, the remaining minority shareholders
may seek to alter the consideration by court order.

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

Employees

As of
December 31, 2003, we had 208 employees worldwide, of whom 81 were employed in
research and development, 60 in sales and marketing, 15 in management and
administration and 52 in operations.  Of
these employees, 174 were based in Israel, 13 were based in the United States,
10 were based in Europe, 5 were based in Latin America, and 6 were based in
Asia-Pacific.  We have employment
agreements with all of our employees.

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

Furthermore,
we and our Israeli employees are subject to provisions of the collective
bargaining agreements between the Histadrut, the General Federation of Labor in
Israel, and the Coordination Bureau of Economic Organizations, including the
Industrialists Association, by order of the Israeli Ministry of Labor and
Welfare.  These provisions principally
concern cost of living increases, recreation pay and other conditions of
employment.  We provide our employees
with benefits and working conditions above the required minimums.  Our employees are not represented by a labor
union.  We consider our
relationship with our employees to be good. 
To date, we have not experienced any
work stoppages.

47

---

---

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

Share Ownership

The
following table sets forth certain information regarding the ownership of our
ordinary shares by our directors and officers as of December 31, 2003.  The percentage of outstanding ordinary
shares is based on 24,675,313 ordinary shares outstanding as of December 31,
2003.

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

|Name                                                                                     |  | Number of
  Ordinary Shares |  | Percentage
  of
  Outstanding
  Ordinary Shares |  
|---------------------------------------------------------------------------------------- |  | --------------------------- |  | ----------------------------------------------- | -
|                                                                                         |  |                             |  |                                                 |  
|                                                                                         |  |                             |  |                                                 |  
|Zohar
  Zisapel                                                                          |  | 3,205,220                   |  | 13.0                                            | %
|Shraga Katz                                                                              |  | 1,018,032                   |  | 4.1                                             | %
|All of
  directors and executive officers as a group,
  Consisting of thirteen people(1) |  | 4,863,114                   |  | 19.7                                            | %

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

Stock
Option Plans

Key
Employee Share Incentive Plan

In August
1996, we adopted our key employee share incentive plan.  We ceased granting options under this plan
as of December 31, 2002 in light of the adoption of our 2003 share option plan
and a change in applicable Israeli tax laws, although options granted under
this plan before December 31, 2002 are still valid subject to the plan.  Employees of our company and our
subsidiaries or affiliates belonging to the RAD-BYNET group are eligible to
participate in the plan.  The share
incentive committee of our board of directors administers the plan.  No options may be granted to any person
serving on the share incentive committee nor
to any person who is or will become as a result of an option grant one of our
controlling shareholders.  The options
expire five to ten years from the date of issuance. The following table
presents option grant information for this plan as of December 31, 2003:

|Ordinary
  shares reserved
  for option grants |  | Options
  outstanding |  | Weighted
  average
  exercise price | 
|---------------------------------------------- |  | --------------------- |  | ----------------------------------- | 
|                                               |  |                       |  |                                     | 
|                                               |  |                       |  |                                     | 
|4,136,671                                      |  | 4,136,671             |  | $  2.54                             | 

48

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Option
Trust

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

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

| | all shares
  arising out of the employees exercise of options are sold immediately upon exercise
  to an unrelated third party; and                                
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                     
| | the employee
  exercising the options pays to the Israel Tax Authority a 50% tax on the net
  revenue resulting from the exercise of options and the sale of shares.

Termination
and Amendment

Our
board of directors may terminate or amend the plan, provided that any action by
our board of directors, which will alter or impair the rights of an option
holder, requires the prior consent of that option holder.

Affiliate
Employees Option Plan

In May
1997, we adopted our affiliate employees option plan.  We ceased granting options under this plan as of December 31,
2002 in light of the adoption of our 2003 share option plan and a change in
applicable Israeli tax laws, although options granted under this plan before
December 31, 2002 are still valid subject to the plan.  This plan has terms that are substantially
identical to the terms of the key employee share incentive plan.  The option committee of our board of
directors administers the plan.  Our
employees, directors and consultants are eligible to participate in the
plan.  No options may be granted to any
person serving on the option committee nor to any person who is or will become
as a result of an option grant one of our controlling shareholders.  The options expire five to ten years from
the date of issuance. The following table presents option grant information for
this plan as of December 31, 2003:

|Ordinary
  shares reserved
  for option grants |  | Options
  outstanding |  | Weighted
  average
  exercise price | 
|---------------------------------------------- |  | --------------------- |  | ----------------------------------- | 
|                                               |  |                       |  |                                     | 
|                                               |  |                       |  |                                     | 
|829,950                                        |  | 829,950               |  | $  5.17                             | 

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

The
2003 Share Option Plan

In
September 2003, our shareholders approved and adopted our 2003 share option plan.   This plan complies with recent changes in
Israeli tax law with respect to stock options. 
It is also intended to be a qualified plan as defined by the U.S. Tax
Code. Our worldwide employees, directors and consultants are eligible to participate
in this plan.  This plan has been
approved by the Israeli Tax Authority as is required by applicable law.

49

---

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|Ordinary
  Shares Reserved for Option Grants |  | Options
  Outstanding |  | Weighted
  Average
  Exercise Price | 
|-------------------------------------------- |  | --------------------- |  | ----------------------------------- | 
|                                             |  |                       |  |                                     | 
|                                             |  |                       |  |                                     | 
|4,872,379                                    |  | 1,515,500             |  | $  4.15                             | 

ITEM
7.          MAJOR
SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

Major Shareholders

The
following table sets forth stock ownership information as of December 31, 2003
(unless otherwise noted below) with respect to:

|1) | Each person
  who is known by us to be the beneficial owner of more than 5% of our
  outstanding ordinary shares; and
|-- | ---------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                      
|2) | All the
  directors and executive officers.                                                                          

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

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

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

|Name                                                                                  |  | Number of
  Ordinary Shares |  | Percentage
  of
  Outstanding
  Ordinary Shares
  (1) |  
|------------------------------------------------------------------------------------- |  | --------------------------- |  | ----------------------------------------------------- | -
|                                                                                      |  |                             |  |                                                       |  
|                                                                                      |  |                             |  |                                                       |  
|Zohar Zisapel (2)                                                                     |  | 3,205,220                   |  | 13.0                                                  | %
|Yehuda Zisapel (2)                                                                    |  | 2,838,000                   |  | 11.5                                                  | %
|Kern Capital
  Management, LLC(3)                                                     |  | 3,392,800                   |  | 13.7                                                  | %
|HarbourVest
  International Private Equity Partners III -
       Direct Fund, L.P.(4) |  | 1,409,175                   |  | 5.7                                                   | %

|(1) | Based on 24,675,313 Ordinary Shares issued and
  outstanding as of December 31, 2003.                                                                                                                                                                                                                                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Yehuda
  Zisapel and Zohar Zisapel are brothers.                                                                                                                                                                                                                                                                                                                                                                                                                  
|(3) | These
  holdings are derived from information furnished to the Company by this
  shareholder as of March 31, 2004. 
  Robert E. Kern Jr. and David G. Kern are principals and controlling
  members of Kern Capital Management, LLC, which has its address at 114 West 47th
  Street, Suite 1926, New York, New York 10036.  This shareholder was not a major shareholder during the periods
  covered by any prior Form 20-F annual reports filed by the Company.

50

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|(4) | The sole
  general partner of HarbourVest International Private Equity Partners
  III-Direct Fund, L.P. is HIPEP III-Direct Associates L.L.C., the managing
  member of which is HarbourVest Partners, LLC.  The address of HarbourVest is One Financial Center, Boston,
  Massachusetts 02111, U.S.A.  The
  members of HIPEP III Direct Associates L.L.C. and HarbourVest Partners LLC
  may be deemed to have an indirect pecuniary interest (within the meaning of
  Rule 16a-1 under the Exchange Act) in an indeterminate portion of the shares
  beneficially owned by HarbourVest International Private Equity Partners
  III-Direct Fund, L.P.  Such members
  disclaim beneficial ownership of these shares within the meaning of Rule
  13d-3 of the Exchange Act.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As of June 2,
2004, 77.4% of our ordinary shares were held in the United States and 68 record
holders were in the United States.

Related Party Transactions

The RAD-BYNET Group of Companies

Yehuda
Zisapel is a principal shareholder and Zohar Zisapel is our chairman of the
board of directors and a principal shareholder of our company.  They are brothers that do not vote as a
group and do not have a voting agreement who, as of December 31, 2003, together
control 24.5% of our company. 
Individually or together, they are also founders, directors and
principal shareholders of several other companies which, together with us and
the other affiliates, are known as the RAD-BYNET group.  These corporations include the following, as
well as several other real estate, holding and pharmaceutical companies:

|AB-NET
  Communications Ltd.      | Modules Inc.                                        | RAD-OP Inc.            
|--------------------------------- | --------------------------------------------------- | -----------------------
|Axerra
  Networks Inc.            | RADCOM Ltd.                                         | RADView
  Software Ltd.
|BYNET Data Communications Ltd.    | RAD Data
  Communications Ltd. and its subsidiaries | RADVision
  Ltd.       
|BYNET
  Electronics Ltd.          | RADWARE Ltd.                                        |                        
|BYNET SEMECH
  (Outsourcing) Ltd. | SILICOM Ltd.                                        | RADWIN Ltd.            
|BYNET
  Systems Applications Ltd. | SANRAD Inc.                                         | RIT
  Technologies Ltd.
|                                  | RAD-Bynet
  Properties and Services (1981) Ltd.     | WISAIR Inc.            

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

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

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

Members of
the RAD-BYNET group provide us on an as-needed basis with finance, legal,
management information systems, marketing, and administrative services, and we
reimburse each company for its costs in providing these services.  The aggregate amount of these expenses was
approximately $175 thousand in 2003.

51

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---

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

Lease Arrangements

We lease
our office space for our current headquarters and principal administrative,
finance, marketing and sales operations from most real estate holding companies
controlled by Yehuda and Zohar Zisapel. 
The leased facility is approximately 51,500 square feet in size.  The lease for this facility is valid until
May 2005, with options to renew for two additional one-year periods.  We also lease additional space in adjacent
buildings from companies controlled by Zohar Zisapel and Yehuda Zisapel.  Additionally, we lease space for our U.S.
headquarters from a real estate holding company controlled by Yehuda Zisapel
and Zohar Zisapel.  This facility is
approximately 4,156 square feet in size. 
The lease for this facility is valid until September 2008.  The aggregate amount of rent and maintenance
expenses related to these properties was approximately $0.9 million in 2003.

Supply Arrangement

We purchase
components from RAD Data Communications Ltd. and other members of the RAD-BYNET
group which we integrate into our products. 
The aggregate purchase price of these components was approximately $300
thousand for the year ended December 31, 2003.

Registration Rights

In
connection with the private placement of preferred shares before our initial
public offering in August 2000, several of our shareholders were granted
registration rights with respect to 14,581,500 ordinary shares which resulted
following conversion of their preferred shares immediately prior to the
completion of our initial public offering. 
The agreement grants registration rights to each of:

| | the majority
  of the holders of the ordinary shares resulting from the conversion of such
  preferred shares; and
|- | ------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                   
| | Yehuda Zisapel
  and Zohar Zisapel.                                                                               

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

52

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Agreement with Our Chief Executive Officer

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

ITEM
8:     FINANCIAL INFORMATION

Consolidated Statements and Other Financial
Information

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

Export Sales

In
2003, 93% of our sales were to customers located outside of Israel.

Legal Proceedings

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

Dividends

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

No Significant Changes

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

Corporate Tax Rate

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

53

---

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

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

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

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

As of
December 31, 2003, our net operating loss carry-forwards for Israeli income tax
purposes amounted to approximately $74 million.  Under Israeli law, these net-operating losses may be carried
forward indefinitely and offset against future taxable income.  We have provided a valuation allowance for
the full amount of the tax benefit derived from these loss carry-forwards due
to our history of operating losses and the uncertainty as to when these
benefits will be utilized.  Deferred
taxes in respect of other temporary differences are immaterial.

As of
December 31, 2003, the net operating loss carry-forwards of our New Jersey
subsidiary for U.S. tax purposes amounted to approximately $6.5 million.  These losses are available to offset any
future U.S. taxable income of our U.S. subsidiary and will expire during the
years 2019 to 2023.

Government Grants

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

For the
years ended December 31, 2002 and 2003, the Chief Scientist provided grants for
research and development expenditures of approximately $1.9 million and $2.0
million, representing 21% and 22% of our total research and development
expenses in each of these respective periods. 
We expect that the Chief Scientist grants will be maintained at the same
approximate percentage of our total research and development expenses in the
short term.

Our total
obligation for royalties to the Chief Scientist for grants received or accrued
plus interest, net of royalties paid, or accrued, amounted to approximately
$10.8 million as of December 31, 2003.

54

---

---

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

|                               |  | Royalties paid or accrued |  
|------------------------------ |  | ------------------------- | -
|                               |  |                           |  
|                               |  | (In thousands)            |  
|Year ended
  December 31, 2001 |  |                           | $
|Year ended
  December 31, 2002 |  |                           | $
|Year ended
  December 31, 2003 |  |                           | $

The
Government of Israel, through its Fund for the Encouragement of Marketing
Activities, awards grants to Israeli companies for overseas marketing expenses,
including expenses for maintaining branches, advertising, catalogs, exhibitions
and surveys, up to a maximum rate of 30% of these expenses, not to exceed $1.0
million annually.  In 1999, we received
grants from the marketing fund totaling approximately $50 thousand.

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

ITEM
9:          THE OFFER AND
LISTING

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

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

|                               |  | Ordinary
  Shares | 
|------------------------------ |  | ----------------- | 
|                               |  |                   | 
|                               |  | High              | 
|                               |  |                   | 
|Year Ending December 31, 2000: |  | 32.00             | 
|                               |  |                   | 
|Year Ending December 31, 2001: |  | 19.31             | 
|                               |  |                   | 
|Year Ending December 31, 2002: |  |                   | 
|                               |  |                   | 
|First
  Quarter                |  | 4.55              | 
|Second
  Quarter               |  | 3.00              | 
|Third
  Quarter                |  | 1.63              | 
|Fourth
  Quarter               |  | 1.39              | 
|                               |  |                   | 
|Year Ending December 31, 2003: |  |                   | 
|                               |  |                   | 
|First
  Quarter                |  | 1.56              | 
|Second
  Quarter               |  | 3.15              | 
|Third
  Quarter                |  | 5.26              | 
|Fourth
  Quarter               |  | 7.47              | 
|                               |  |                   | 
|Most Recent Six Months:        |  |                   | 
|December                       |  | 7.47              | 
|January                        |  | 8.69              | 
|February                       |  | 7.40              | 
|March                          |  | 7.03              | 
|April                          |  | 7.48              | 
|May                            |  | 5.98              | 

55

---

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As of June
25, 2004, the last reported price of one of our ordinary shares on the Nasdaq
National Market was $5.39.

ITEM
10.          ADDITIONAL
INFORMATION

Memorandum and Articles of Association

A
description of our memorandum and articles of association was previously
provided in our registration statement on Form F-1 (Registration Statement
333-12312) filed with the Securities and Exchange Commission on August 3, 2000,
and is incorporated herein by reference.

Material Contracts

None.

Exchange Controls

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

Taxation

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

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

Israeli Capital Gains Tax on Sales of Shares

Israeli law
imposes a capital gains tax on the sale of any capital assets by residents of Israel, as defined for Israeli tax purposes, and
on the sale of assets located in Israel, including shares in Israeli
companies, by both residents and non-residents of Israel unless a specific
exemption is available or unless a tax treaty between Israel and the
shareholders country of residence provides otherwise . The law distinguishes
between real gain and inflationary surplus. The inflationary surplus is a
portion of the total capital gain that is equivalent to the increase of the
relevant assets purchase price which is attributable to the increase in the
Israeli consumer price index or, in certain
circumstances, a foreign currency exchange rate, between the date of
purchase and the date of sale. The real gain is the excess of the total capital
gain over the inflationary surplus.  
Capital gains (other than gains deriving from the sale of listed
securities) derived after January 1, 2003, are taxed at a rate of 25% for both
individuals and corporations. Regarding assets acquired prior to January 1,
2003, the tax rate of 25% will apply to a proportionate part of the gain in
accordance with the holding periods of the asset, before and after January 1,
2003, on a linear basis.

Pursuant
to the Tax Reform, generally, capital gains tax is imposed at a rate of 15% on
real gains derived on or after January 1, 2003, from the sale of shares in
(i) companies publicly traded on the Tel Aviv Stock Exchange (TASE) or;
(ii) Israeli companies publicly traded on Nasdaq or another recognized stock
market in a country that has a treaty for the prevention of double taxation
with Israel (such as us), or
(iii) companies dually traded on both the TASE and Nasdaq or a recognized stock
market outside of Israel.
This tax rate is contingent upon the shareholder not claiming a deduction for
financing expenses in connection
with such shares (in which case the gain will be taxed at a rate of 25%), and does not apply to: (i) the sale of shares to a relative (as defined in
the tax reform); (ii) the sale of shares by dealers in securities; or (iii) the sale of shares by shareholders
that report in accordance with the Inflationary Adjustment Law (who will be taxed at a rate of 36% for
corporations and at a marginal tax rate of up to 50% for individuals). 
The tax basis of shares acquired prior to January 1, 2003, will be
determined in accordance with the average closing share price in the three
trading days preceding January 1, 2003. 
However, a request may be made to the tax authorities to consider the
actual adjusted cost of the shares as the tax basis if it is higher than such
average price.

56

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In
December 2003, regulations promulgated pursuant to the tax reform were amended
so that, in certain circumstances, capital gains derived from the sale and
subsequent (same day) repurchase of shares traded on the TASE or from shares of
Israeli companies publicly traded on a recognized stock market in a country
that has a treaty for the prevention of double taxation with Israel, may be
taxed at a rate equal to the withholding tax rate applicable to revenues
derived from such sale. In accordance with an announcement published by the
Israeli Income Tax Commission, the withholding tax rate applicable to the sale
of such shares until the end of the 2003 tax year, which was equal at such time
to 1% of the revenues generated in their sale, was determined as the final tax
rate applicable to such sale. The amended regulations also determined that the
day of such sale and repurchase shall be considered the new date of purchase of
such shares. The foregoing was not applicable to: (i) dealers in securities;
(ii) shareholders that report in accordance with the Inflationary Adjustment
Law; (iii)  shareholders who acquired
their shares prior to an initial public offering; (iv) in some cases,
shareholders that received their shares within the framework of an
employer-employee relationship; or (v) shareholders claiming a deduction for
financing expenses in connection with such shares. The regulations further provided
that with respect to shares of Israeli companies traded on a stock market
outside of Israel, the market price determined at the close of the trading day
preceding the day of sale and repurchase of such shares, shall constitute the
new tax basis for any future sale of such shares.

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

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

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

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

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

57

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Israeli Taxation of Non-Resident Holders of
Shares

Non-residents
of Israel are subject to income tax on income accrued or derived from sources
in Israel.  These sources of income
include passive income, including dividends, royalties and interest, as well as
non-passive income from services provided in Israel.  On distributions of dividends other than bonus shares or stock
dividends, income tax is withheld at the source.  Unless a different rate is provided in a treaty between Israel
and the shareholders country of residence, the withholding rate is as follows:

|                                                  |  | Dividends
  not generated by an approved enterprise               | 
|------------------------------------------------- |  | ----------------------------------------------------------------- | 
|                                                  |  |                                                                   | 
|Dividends
  generated by
  an approved enterprise |  | U.S.
  company holding
  10% or more of our issued
  voting power | 
|                                                  |  |                                                                   | 
|                                                  |  |                                                                   | 
|15%                                               |  | 12.5%                                                             | 

Israeli Foreign Exchange Regulations

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

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

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

U.S. Federal Income Tax Considerations

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

| | an
  individual who is a citizen or resident of the United States,                                                                                                                                                                                                                       
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                          
| | a
  corporation (or other entity treated as a corporation for U.S. federal tax
  purposes) created or organized in the United States or under the laws of the
  United States or of any state or the District of Columbia,                                                               
|  |                                                                                                                                                                                                                                                                                          
| | a
  partnership (or other entity treated as a partnership for U.S. federal tax
  purposes) created or organized in the United States or under the laws of the
  United States or of any state or the District of Columbia, expect as
  otherwise provided by future Treasury regulations,
|  |                                                                                                                                                                                                                                                                                          
| | an estate,
  the income of which is includible in gross income for U.S. federal income tax
  purposes regardless of its source, or                                                                                                                                                       
|  |                                                                                                                                                                                                                                                                                          
| | a trust, if
  a court within the United States is able to exercise primary supervision over
  the administration of the trust and one or more U.S. persons have the authority
  to control all substantial decisions of the trust.                                                       

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

58

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

| | are
  broker-dealers or insurance companies;                                                                             
|- | -------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                          
| | have elected
  mark-to-market accounting;                                                                                
|  |                                                                                                                          
| | are
  tax-exempt organizations;                                                                                          
|  |                                                                                                                          
| | are
  financial institutions or financial services entities;                                                             
|  |                                                                                                                          
| | hold
  ordinary shares as part of a straddle, hedge, conversion or other integrated
  transaction with other investments;
|  |                                                                                                                          
| | own
  directly, indirectly or by attribution at least 10% of our voting power; and                                       
|  |                                                                                                                          
| | have a
  functional currency that is not the U.S. dollar.                                                                

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

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

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

Taxation of Dividends Paid on Ordinary Shares

Subject to
the discussion below under Tax Consequences if We are a Passive Foreign
Investment Company, a U.S. holder will be required to include in gross income
as ordinary income the amount of any distribution paid on ordinary shares,
including any Israeli taxes withheld from the amount paid, on the date the
distribution is received, to the extent the distribution is paid out of our
current or accumulated earnings and profits as determined for U.S. federal
income tax purposes.  These
distributions will be foreign source passive income (or in some cases,
financial services income) for U.S. foreign tax credit purposes and will not be
eligible for the dividends received deduction otherwise available to
corporations.  Distributions in excess
of earnings and profits will be applied against and will reduce the U.S.
holders basis in the ordinary shares and, to the extent in excess of that
basis, will be treated as gain from the sale or exchange of ordinary shares.

Distributions
of current or accumulated earnings and profits paid in foreign currency to a
U.S. holder will be includible in the income of a U.S. holder in a U.S. dollar
amount calculated by reference to the exchange rate on the day the distribution
is received.  A U.S. holder that
receives a foreign currency distribution and converts the foreign currency into
U.S. dollars after receipt will have foreign exchange gain or loss based on any
appreciation or depreciation in the value of the foreign currency against the
U.S. dollar, which will generally be U.S. source ordinary income or loss.

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

59

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

| | if the U.S.
  holder has not held the ordinary shares for at least 16 days of the
  30 day period beginning on the date which is 15 days before the
  ex-dividend date; or
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                           
| | to the
  extent the U.S. holder is under an obligation to make related payments on
  substantially similar or related property.                                           

Any days
during which a U.S. holder has substantially diminished its risk of loss on the
ordinary shares are not counted toward meeting the 16 day holding period
required by the statute.

Taxation of the Disposition of Ordinary
Shares

Subject to
the discussion below under Tax Consequences if We are a Passive Foreign
Investment Company, upon the sale, exchange or other disposition of ordinary
shares, a U.S. holder will recognize capital gain or loss in an amount equal to
the difference between the U.S. holders basis in the ordinary shares, which is
usually the cost to the U.S. holder of the shares, and the amount realized on
the disposition.  A disposition of
shares will be considered to occur on the trade date, regardless of the
holders method of accounting.  Capital
gain from the sale, exchange or other disposition of ordinary shares held more
than one year is long-term capital gain, and is eligible for a reduced rate of
taxation in the case of individuals. 
Gain or loss recognized by a U.S. holder on a sale, exchange or other
disposition of ordinary shares generally will be treated as U.S. source income
for U.S. foreign tax credit purposes. 
The deductibility of a capital loss recognized on the sale, exchange or
other disposition of ordinary shares is subject to limitations.

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

Tax Consequences if We Are a Passive Foreign
Investment Company

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

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

60

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| | the three
  previous years; or                                                         
|- | ---------------------------------------------------------------------------------------
|  |                                                                                        
| | the U.S.
  holders holding period for ordinary shares before the present taxable year.

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

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

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

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

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

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

Although we
do not believe that we were a PFIC in 2003, there can be no assurance that the
IRS will agree with that conclusion or that we will not become a PFIC in 2004
or in a subsequent year.  The tests for
determining PFIC status are applied annually and it is difficult to make
accurate predictions of future income and assets, which are relevant to this
determination.    U.S. holders who hold
ordinary shares during a period when we are a PFIC will be subject to these
rules, even if we cease to be a PFIC, subject to specified exceptions for U.S.
holders who made a QEF election. U.S. holders are urged to consult their tax
advisors about the PFIC rules, including QEF and mark-to-market elections.

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

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

| | the item is
  effectively connected with the conduct by the non-U.S. holder of a trade or
  business in the United States and:
|- | ------------------------------------------------------------------------------------------------------------------------------

61

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| | (i)  | in the case
  of a resident of a country which has a treaty with the United States, the
  item is attributable to a permanent establishment; or
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------
| |      |                                                                                                                                                
| | (ii) | in the case
  of an individual, the item is attributable to a fixed place of business in
  the United States;                                  

| | the non-U.S.
  holder is an individual who holds the ordinary shares as a capital asset and
  is present in the United States for 183 days or more in the taxable year
  of the disposition and does not qualify for an exemption; or
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                      
| | the non-U.S.
  holder is subject to tax under the provisions of U.S. tax law applicable to
  U.S. expatriates.                                                                                                                       

Information Reporting and Back-up Withholding

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

Non-U.S.
holders generally are not subject to information reporting or back-up
withholding for dividends paid on, or upon the disposition of, ordinary shares,
provided that the non-U.S. holder provides a taxpayer identification number,
certifies to its foreign status, or establishes another exemption to the
information reporting or back-up withholding requirements.

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

Documents on Display

We file
reports and other information with the SEC. 
These reports include certain financial and statistical information
about us, and may be accompanied by exhibits. 
You may read and copy any document we file with the SEC at the SECs
Public Reference Room at 450 Fifth Street, Washington D.C. 20549.  Please call the SEC at 1-800-SEC-0330 for
further information on the public reference rooms.  You may also visit us on the World Wide Web at www.ceragon.com.

ITEM
11.          QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

We are
exposed to financial market risk associated with changes in foreign currency
exchange rates.  The majority of our
revenue and expenses are transacted in U.S. dollars.  A portion of our expenses and revenues, however, are denominated
in New Israeli Shekels, Euros, British pounds, and other foreign
currencies.  During 2003, in order to
protect against the volatility of future cash flows caused by changes in foreign
currency exchange rates, we used forward contracts to hedge material
amounts.  As of year end, the
outstanding balance of these forward contracts was immaterial.

62

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---

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

As of
December 31, 2003, we had no other exposure to changes in interest rates and
had no interest rate derivative financial instruments outstanding.

ITEM
12.          DESCRIPTION OF
SECURITIES OTHER THAN EQUITY SECURITIES.

Not applicable

63

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PART II

ITEM
13.          DEFAULTS,
DIVIDEND ARREARAGES AND DELINQUENCIES.

None

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

Use of Proceeds

As of
December 31, 2003, approximately 58% of the net offering proceeds from our
initial public offering were invested in short term investments.  The remaining 42% of the net offering
proceeds were invested in long term investments.  During fiscal year 2003, we used $0.4 million of the net offering
proceeds on capital expenditures, including manufacturing equipment, research
equipment and leasehold improvements.

ITEM
15.          CONTROLS AND
PROCEDURES

(a) The
Company performed an evaluation of the effectiveness of its disclosure controls
and procedures that are designed to ensure that the material financial and
non-financial information required to be disclosed on Form 20-F and filed with
the Securities and Exchange Commission is recorded, processed, summarized and
reported timely.  Based on the Companys
evaluation, the Companys management, including the CEO and CFO, has concluded
that the Companys disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d 15(e) of the Securities Exchange Act of 1934, as amended) as
of the end of the period covered by this report are effective.  Notwithstanding the foregoing, there can be
no assurance that the Companys disclosure controls and procedures will detect
or uncover all failures of persons within Ceragon to disclose material
information otherwise required to be set forth in the Companys reports.

(b) There
have been no significant changes in Companys internal controls or in other
factors that could significantly affect these controls subsequent to the date
of the evaluation thereof.  Therefore,
no corrective actions with regard to significant deficiencies and material
weaknesses were taken.

ITEM
16.          [RESERVED]

ITEM
16A.       AUDIT COMMITTEE FINANCIAL EXPERT

The
Companys board of directors has determined that Mr. Joseph Atsmon is the audit
committee financial expert.

ITEM
16B.       CODE OF ETHICS

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

64

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ITEM
16C.       PRINCIPAL ACCOUNTING FEES AND
SERVICES

Fees Paid to Independent Auditors

The
following table sets forth, for each of the years indicated, the fees paid to
our independent auditors and the percentage of each of the fees out of the
total amount paid to the auditors.

|                    |  | Year Ended
  December 31, |       
|------------------- |  | ------------------------- | ------
|                    |  |                           |       
|                    |  | 2002                      |       
|                    |  |                           |       
|Services
  Rendered |  | Fees                      |       
|                    |  |                           |       
|Audit (1)           |  | $                         | 35,000
|Audit-related(2)    |  |                           | ---   
|Tax (3)             |  | $                         | 5,000 
|Other (4)           |  |                           | ---   
|Total               |  | $                         | 40,000

|(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.                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                               
|(4) | Other fees
  include services related to consulting services provided to two of our
  subsidiaries.                                                                                                                                           

Policies
and Procedures

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

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

Not Applicable.

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

Not Applicable.

65

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PART III

ITEM
17.          FINANCIAL
STATEMENTS

Not applicable.

ITEM
18.          FINANCIAL
STATEMENTS

The
Consolidated Financial Statements and related notes thereto required by this
item are contained on pages F-1 through F-31hereof.

ITEM
19.          EXHIBITS

|(a) | Index to Consolidated Financial Statements                                                             |  | PAGE
|--- | ------------------------------------------------------------------------------------------------------ |  | ----
|    |                                                                                                        |  |     
|    |                                                                                                        |  |     
|    | Reports of
  Independent Auditors and Independent Public Accountants                                   |  | F-2 
|    | Consolidated
  Balance Sheets at December 31, 2003 and 2002                                            |  | F-4 
|    | Consolidated
  Statements of Operations for the Years Ended December 31, 2003, 2002,  and 2001         |  | F-6 
|    | Statements
  of Changes in Shareholders Equity for the Years Ended December 31, 2003,
  2002 and 2001 |  | F-7 
|    | Consolidated
  Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and
  2001         |  | F-8 
|    | Notes to
  Consolidated Financial Statements                                                           |  | F-9 
|    |                                                                                                        |  |     

|(b)  | Exhibits                                                                                                                                                              |  | 
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
|     |                                                                                                                                                                       |  | 
|1.1  | Memorandum
  of Association (English translation accompanied by Hebrew original*                                                                                      |  | 
|1.2  | Articles of
  Association**                                                                                                                                           |  | 
|4.1  | Tenancy
  Agreement, dated as of February 22, 2000, by and among the Company, Zisapel
  Properties Ltd. and Klil & Michael Properties Ltd. (English
  translation)*** |  | 
|8.1  | List of
  Subsidiaries                                                                                                                                                |  | 
|10.1 | Consent of
  Independent Auditors                                                                                                                                     |  | 
|10.2 | Certification
  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
  Sarbanes-Oxley Act of 2002                                            |  | 

* Previously
filed as exhibit 3.1 in connection with the Companys Registration Statement on
Form F-1 (Registration Statement 333-12312) on August 3, 2000 and incorporated
herein by reference.
** Previously filed as exhibit 3.2 in connection with the Companys
Registration Statement on Form F-1 (Registration Statement 333-12312) on August
3, 2000 and incorporated herein by reference.
*** Previously filed as exhibit 10.3 in connection with the Companys
Registration Statement on Form F-1 (Registration Statement 333-12312) on August
3, 2000 and incorporated herein by reference.

66



---

---

CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2003

IN U.S. DOLLARS

INDEX

|                                                |  | Page    
|----------------------------------------------- |  | --------
|                                                |  |         
|                                                |  |         
|Reports of Independent Auditors                 |  | F2 - F3 
|                                                |  |         
|Consolidated Balance Sheets                     |  | F4 - F5 
|                                                |  |         
|Consolidated Statements of Operations           |  | F6      
|                                                |  |         
|Statements of Changes in Shareholders
  Equity |  | F7      
|                                                |  |         
|Consolidated Statements of Cash Flows           |  | F8      
|                                                |  |         
|Notes to Consolidated Financial Statements      |  | F9  F31

- - - - - - - - - - - - -

---

---

| |  | 
| |  | 

REPORT OF
INDEPENDENT AUDITORS

To the Shareholders of

CERAGON NETWORKS LTD.

We have
audited the accompanying consolidated balance sheets of Ceragon Networks Ltd.
(the Company) and its subsidiaries as of December 31, 2002 and 2003, and the
related consolidated statements of operations, changes in shareholders equity
and cash flows for each of the two years in the period ended December 31, 2003.
These financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these financial statements based
on our audits. The financial statements of Ceragon Networks Ltd. as of December
31, 2001 and for the year then ended, were audited by other auditors who have
ceased operations as a foreign associated firm of the Securities and Exchange
Commission Practice Section of the American Institute of Certified Public
Accountants and whose report dated January 31, 2002, expressed an unqualified
option on those statements.

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

In our
opinion, based on our audits, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of the Company and its subsidiaries as of December 31, 2002 and 2003,
and the consolidated results of their operations and their cash flows for each
of the two years in the period ended December 31, 2003, in conformity with U.S.
generally accepted accounting principles.

|Tel-Aviv,
  Israel
  January 29, 2004 | KOST FORER GABBAY & KASIERER
  A Member of Ernst & Young Global
|------------------------------------- | ---------------------------------------------------------------

F-2

---

---

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

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of

CERAGON NETWORKS LTD.

We have audited the accompanying consolidated balance sheets of Ceragon
Networks Ltd. and its subsidiaries as of December 31, 2001 and 2000 and the
related consolidated statements of operations, changes in shareholders equity
and cash flows for each of the three years in the period ended December 31,
2001. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

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

| |  | Luboshitz KasiererArthur Andersen
| |  | ---------------------------------

Tel-Aviv, Israel
January 31, 2002

F-3

---

---

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

|                                                                                                                  |  |      |  | December
  31, |       
|----------------------------------------------------------------------------------------------------------------- |  | ---- |  | -------------- | ------
|                                                                                                                  |  |      |  |                |       
|                                                                                                                  |  | Note |  | 2002           |       
|                                                                                                                  |  |      |  |                |       
|ASSETS                                                                                                            |  |      |  |                |       
|                                                                                                                  |  |      |  |                |       
|CURRENT
  ASSETS:                                                                                                 |  |      |  |                |       
|Cash
  and cash equivalents                                                                                       |  |      |  | $              | 4,688 
|Short-term
  bank deposits                                                                                        |  |      |  |                | 10,853
|Marketable
  securities                                                                                           |  | 3    |  |                | 11,743
|Trade
  receivables (net of allowance for doubtful accounts of
            $ 500 at December
  31, 2002 and 2003) |  |      |  |                | 4,329 
|Other
  accounts receivable and prepaid expenses                                                                  |  | 4    |  |                | 1,268 
|Inventories                                                                                                       |  | 5    |  |                | 8,054 
|                                                                                                                  |  |      |  |                |       
|                                                                                                                  |  |      |  |                |       
|Total
  current assets                                                                                            |  |      |  |                | 40,935
|                                                                                                                  |  |      |  |                |       
|                                                                                                                  |  |      |  |                |       
|LONG-TERM
  INVESTMENTS:                                                                                          |  |      |  |                |       
|Long-term
  bank deposits                                                                                         |  |      |  |                | 4,214 
|Long-term
  marketable securities                                                                                 |  | 3    |  |                | 11,675
|Severance pay fund                                                                                                |  |      |  |                | 1,200 
|                                                                                                                  |  |      |  |                |       
|                                                                                                                  |  |      |  |                |       
|Total
  long-term investments                                                                                     |  |      |  |                | 17,089
|                                                                                                                  |  |      |  |                |       
|                                                                                                                  |  |      |  |                |       
|PROPERTY AND
  EQUIPMENT, NET                                                                                     |  | 6    |  |                | 3,616 
|                                                                                                                  |  |      |  |                |       
|                                                                                                                  |  |      |  |                |       
|Total
  assets                                                                                                    |  |      |  | $              | 61,640
|                                                                                                                  |  |      |  |                |       

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

F-4

---

---

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

|                                                                                                                                                                                                          |  |      |  | December
  31, |         
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- |  | -------------- | --------
|                                                                                                                                                                                                          |  |      |  |                |         
|                                                                                                                                                                                                          |  | Note |  | 2002           |         
|                                                                                                                                                                                                          |  |      |  |                |         
|LIABILITIES
  AND SHAREHOLDERS EQUITY                                                                                                                                                                    |  |      |  |                |         
|                                                                                                                                                                                                          |  |      |  |                |         
|CURRENT LIABILITIES:                                                                                                                                                                                      |  |      |  |                |         
|Trade
  payables                                                                                                                                                                                          |  |      |  | $              | 5,744   
|Deferred
  revenues                                                                                                                                                                                       |  |      |  |                | 647     
|Other
  accounts payable and accrued expenses                                                                                                                                                             |  | 7    |  |                | 4,158   
|                                                                                                                                                                                                          |  |      |  |                |         
|                                                                                                                                                                                                          |  |      |  |                |         
|Total
  current liabilities                                                                                                                                                                               |  |      |  |                | 10,549  
|                                                                                                                                                                                                          |  |      |  |                |         
|                                                                                                                                                                                                          |  |      |  |                |         
|ACCRUED
  SEVERANCE PAY                                                                                                                                                                                   |  |      |  |                | 1,825   
|                                                                                                                                                                                                          |  |      |  |                |         
|                                                                                                                                                                                                          |  |      |  |                |         
|COMMITMENTS AND CONTINGENT LIABILITIES                                                                                                                                                                    |  | 8    |  |                |         
|                                                                                                                                                                                                          |  |      |  |                |         
|SHAREHOLDERS
  EQUITY:                                                                                                                                                                                   |  | 9    |  |                |         
|Share
  capital                                                                                                                                                                                           |  |      |  |                |         
|Ordinary
  shares of NIS 0.01 par value -                                                                                                                                                                 |  |      |  |                |         
|Authorized:
  40,000,000 shares at December 31, 2002 and
                 2003;
  Issued and outstanding: 22,578,346 and 24,675,313
                 shares
  at December 31, 2002 and 2003, respectively |  |      |  |                | 56      
|Additional
  paid-in capital                                                                                                                                                                              |  |      |  |                | 169,286 
|Deferred
  stock compensation                                                                                                                                                                             |  |      |  |                | (1,772  
|Accumulated
  deficit                                                                                                                                                                                     |  |      |  |                | (118,304
|                                                                                                                                                                                                          |  |      |  |                |         
|                                                                                                                                                                                                          |  |      |  |                |         
|Total
  shareholders equity                                                                                                                                                                              |  |      |  |                | 49,266  
|                                                                                                                                                                                                          |  |      |  |                |         
|                                                                                                                                                                                                          |  |      |  |                |         
|Total
  liabilities and shareholders equity                                                                                                                                                              |  |      |  | $              | 61,640  
|                                                                                                                                                                                                          |  |      |  |                |         

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

F-5

---

---

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

|                                                                                                  |                                                                           |        |  | Year ended December 31, |           
|------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------- | ------ |  | ----------------------- | ----------
|                                                                                                  |                                                                           |        |  |                         |           
|                                                                                                  |                                                                           | Note   |  | 2001                    |           
|                                                                                                  |                                                                           |        |  |                         |           
|                                                                                                  |                                                                           |        |  |                         |           
|Revenues                                                                                          |                                                                           | 12     |  | $                       | 24,852    
|Cost of
  revenues                                                                                |                                                                           |        |  |                         | 45,282    
|                                                                                                  |                                                                           |        |  |                         |           
|                                                                                                  |                                                                           |        |  |                         |           
|Gross profit
  (loss)                                                                             |                                                                           |        |  |                         | (20,430   
|                                                                                                  |                                                                           |        |  |                         |           
|                                                                                                  |                                                                           |        |  |                         |           
|Operating
  expenses:                                                                             |                                                                           |        |  |                         |           
|Research
  and development                                                                        |                                                                           |        |  |                         | 12,967    
|Less
  - grants and participations                                                                |                                                                           |        |  |                         | 2,660     
|                                                                                                  |                                                                           |        |  |                         |           
|                                                                                                  |                                                                           |        |  |                         |           
|Research
  and development, net                                                                   |                                                                           |        |  |                         | 10,307    
|Selling
  and marketing, net                                                                      |                                                                           | 8a(2)  |  |                         | 11,924    
|General
  and administrative                                                                      |                                                                           |        |  |                         | 5,770     
|Amortization
  of deferred stock compensation (a)                                                 |                                                                           |        |  |                         | 6,431     
|Restructuring
  and Non-recurring expenses
            (income), net                              |                                                                           | 11     |  |                         | 4,750     
|                                                                                                  |                                                                           |        |  |                         |           
|                                                                                                  |                                                                           |        |  |                         |           
|Total
  operating expenses                                                                        |                                                                           |        |  |                         | 39,182    
|                                                                                                  |                                                                           |        |  |                         |           
|                                                                                                  |                                                                           |        |  |                         |           
|Operating
  loss                                                                                  |                                                                           |        |  |                         | (59,612   
|Financial
  income, net                                                                           |                                                                           | 13     |  |                         | 2,769     
|Other financial expenses  Non - cash charge
       relating to a puttable warrant                |                                                                           | 2u, 9c |  |                         | -         
|                                                                                                  |                                                                           |        |  |                         |           
|                                                                                                  |                                                                           |        |  |                         |           
|Net loss                                                                                          |                                                                           |        |  | $                       | (56,843   
|                                                                                                  |                                                                           |        |  |                         |           
|                                                                                                  |                                                                           |        |  |                         |           
|Basic and
  diluted net loss per share                                                            |                                                                           |        |  | $                       | (2.69     
|                                                                                                  |                                                                           |        |  |                         |           
|                                                                                                  |                                                                           |        |  |                         |           
|Weighted
  average number of shares used in
       computing basic and diluted net loss per share |                                                                           |        |  |                         | 21,099,336
|                                                                                                  |                                                                           |        |  |                         |           
|                                                                                                  |                                                                           |        |  |                         |           
|(a)                                                                                               | Amortization
  of deferred stock compensation
  relates to the following: |        |  |                         |           
|                                                                                                  |                                                                           |        |  |                         |           
|                                                                                                  | Cost of
  revenues                                                        |        |  |                         | $         
|                                                                                                  | Research and
  development expenses, net                                  |        |  |                         |           
|                                                                                                  | Selling and
  marketing expenses, net                                     |        |  |                         |           
|                                                                                                  | General and
  administrative expenses                                     |        |  |                         |           
|                                                                                                  |                                                                           |        |  |                         |           
|                                                                                                  |                                                                           |        |  |                         |           
|                                                                                                  | Total
  amortization of deferred stock
       compensation                |        |  |                         | $         
|                                                                                                  |                                                                           |        |  |                         |           

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

F-6

---

---

|                                               
|-----------------------------------------------
|CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES     
|                                               
|STATEMENTS OF CHANGES IN SHAREHOLDERS
  EQUITY
|                                               
|U.S. dollars in thousands                      

|                                                                                                 |  | Share
  capital |        | Additional
  paid-in
  capital |   | Deferred
  stock
  compensation |   | Accumulated
  deficit |         | Total
  shareholders
  equity |  
|------------------------------------------------------------------------------------------------ |  | --------------- | ------ | ------------------------------ | - | ------------------------------- | - | --------------------- | ------- | ------------------------------ | -
|                                                                                                 |  |                 |        |                                |   |                                 |   |                       |         |                                |  
|                                                                                                 |  |                 |        |                                |   |                                 |   |                       |         |                                |  
|Balance as of January 1,
  2001                                                                  |  | $               | 52     |                                | $ | 170,348                         |   | $                     | (12,231 | )                              | $
|                                                                                                 |  |                 |        |                                |   |                                 |   |                       |         |                                |  
|Exercise
  of stock options                                                                      |  |                 | 4      |                                |   | -                               |   |                       | -       |                                |  
|Reversal
  of deferred stock
            compensation
  related to forfeited
            options |  |                 | -      |                                |   | (952                            | ) |                       | 952     |                                |  
|Additional
  IPO expenses                                                                        |  |                 | -      |                                |   | (41                             | ) |                       | -       |                                |  
|Amortization
  of deferred stock
            compensation                                        |  |                 | -      |                                |   | -                               |   |                       | 6,431   |                                |  
|Net
  loss                                                                                       |  |                 | -      |                                |   | -                               |   |                       | -       |                                |  
|                                                                                                 |  |                 |        |                                |   |                                 |   |                       |         |                                |  
|                                                                                                 |  |                 |        |                                |   |                                 |   |                       |         |                                |  
|Balance as of December 31,
  2001                                                                |  |                 | 56     |                                |   | 169,355                         |   |                       | (4,848  | )                              |  
|                                                                                                 |  |                 |        |                                |   |                                 |   |                       |         |                                |  
|Exercise
  of stock options                                                                      |  |                 | *)
  - |                                |   | 33                              |   |                       | -       |                                |  
|Reversal
  of deferred stock
            compensation
  related to forfeited
            options |  |                 | -      |                                |   | (102                            | ) |                       | 102     |                                |  
|Amortization
  of deferred stock
            compensation                                        |  |                 | -      |                                |   | -                               |   |                       | 2,974   |                                |  
|Net
  loss                                                                                       |  |                 | -      |                                |   | -                               |   |                       | -       |                                |  
|                                                                                                 |  |                 |        |                                |   |                                 |   |                       |         |                                |  
|                                                                                                 |  |                 |        |                                |   |                                 |   |                       |         |                                |  
|Balance as of December 31,
  2002                                                                |  |                 | 56     |                                |   | 169,286                         |   |                       | (1,772  | )                              |  
|                                                                                                 |  |                 |        |                                |   |                                 |   |                       |         |                                |  
|Issuance
  of restricted shares to a
            lessor, net                                     |  |                 | *)
  - |                                |   | 314                             |   |                       | -       |                                |  
|Stock
  based compensation related to
            warrants granted
  to consultants              |  |                 | -      |                                |   | 7                               |   |                       | -       |                                |  
|Exercise
  of a puttable warrant to supplier                                                     |  |                 | 2      |                                |   | 4,305                           |   |                       | -       |                                |  
|Exercise
  of employee stock options                                                             |  |                 | 3      |                                |   | 1,154                           |   |                       | -       |                                |  
|Reversal
  of deferred stock
            compensation
  related to forfeited
            options |  |                 | -      |                                |   | (23                             | ) |                       | 23      |                                |  
|Amortization
  of deferred stock
            compensation                                        |  |                 | -      |                                |   | -                               |   |                       | 1,354   |                                |  
|Net
  loss                                                                                       |  |                 | -      |                                |   | -                               |   |                       | -       |                                |  
|                                                                                                 |  |                 |        |                                |   |                                 |   |                       |         |                                |  
|                                                                                                 |  |                 |        |                                |   |                                 |   |                       |         |                                |  
|Balance as of December 31,
  2003                                                                |  | $               | 61     |                                | $ | 175,043                         |   | $                     | (395    | )                              | $
|                                                                                                 |  |                 |        |                                |   |                                 |   |                       |         |                                |  

*)          Represents
an amount lower than $ 1.

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

F-7

---

---

|                                          
|------------------------------------------
|CERAGON NETWORKS LTD. AND ITS SUBSIDIARIES
|CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                                          
|U.S. dollars in thousands                 

|                                                                                                            |  | Year ended December 31, |        
|----------------------------------------------------------------------------------------------------------- |  | ----------------------- | -------
|                                                                                                            |  |                         |        
|                                                                                                            |  | 2001                    |        
|                                                                                                            |  |                         |        
|Cash flows
  from operating activities:                                                                     |  |                         |        
|Net
  loss                                                                                                  |  | $                       | (56,843
|Adjustments
  required to reconcile net loss to net cash used in
            operating
  activities:        |  |                         |        
|Depreciation                                                                                                |  |                         | 2,015  
|Amortization
  of deferred stock compensation                                                               |  |                         | 6,431  
|Stock
  based compensation related to warrants granted to
                 consultants                      |  |                         | -      
|Other financial expense - non - cash charge relating to a puttable
                 warrant                 |  |                         | -      
|Loss
  (gain) from sales and impairment of property and
                 equipment                          |  |                         | 2,018  
|Accrued
  severance pay, net                                                                                |  |                         | 77     
|Accrued
  interest on short-term bank deposits                                                              |  |                         | (410   
|Accrued
  interest on long-term bank deposits                                                               |  |                         | -      
|Interest
  accrued and amortization of premium on held to maturity
                 marketable
  securities |  |                         | (192   
|Decrease
  (increase) in trade receivables                                                                  |  |                         | 9,883  
|Decrease
  (increase) in other accounts receivable and prepaid
                 expenses                    |  |                         | 3,291  
|Decrease
  (increase) in inventories                                                                        |  |                         | 14,813 
|Increase
  (decrease) in trade payables                                                                     |  |                         | (6,581 
|Increase
  in deferred revenues                                                                             |  |                         | -      
|Increase
  (decrease) in other accounts payable and accrued
                 expenses                       |  |                         | 1,422  
|                                                                                                            |  |                         |        
|                                                                                                            |  |                         |        
|Net cash
  used in operating activities                                                                     |  |                         | (24,076
|                                                                                                            |  |                         |        
|                                                                                                            |  |                         |        
|Cash flows
  from investing activities:                                                                     |  |                         |        
|Purchase
  of property and equipment                                                                        |  |                         | (3,177 
|Proceeds
  from sales of property and equipment                                                             |  |                         | 223    
|Short-term
  bank deposits, net                                                                             |  |                         | (16,075
|Investment
  in long-term bank deposits                                                                     |  |                         | -      
|Investment
  in held to maturity marketable securities                                                      |  |                         | (20,501
|Proceeds
  from sales and maturities of held to maturity marketable
            securities                  |  |                         | -      
|                                                                                                            |  |                         |        
|                                                                                                            |  |                         |        
|Net cash
  provided by (used in) investing activities                                                       |  |                         | (39,530
|                                                                                                            |  |                         |        
|                                                                                                            |  |                         |        
|Cash flows from
  financing activities:                                                                     |  |                         |        
|Proceeds
  from exercise of stock options                                                                   |  |                         | 4      
|Payment
  of additional IPO expenses                                                                        |  |                         | (41    
|                                                                                                            |  |                         |        
|                                                                                                            |  |                         |        
|Net cash
  provided by (used in) financing activities                                                       |  |                         | (37    
|                                                                                                            |  |                         |        
|                                                                                                            |  |                         |        
|Increase
  (decrease) in cash and cash equivalents                                                          |  |                         | (63,643
|Cash and
  cash equivalents at the beginning of the year                                                    |  |                         | 70,064 
|                                                                                                            |  |                         |        
|                                                                                                            |  |                         |        
|Cash and
  cash equivalents at the end of the year                                                          |  | $                       | 6,421  
|                                                                                                            |  |                         |        
|Supplemental
  disclosure of cash flows activities:                                                         |  |                         |        
|Cash
  paid during the year for interest                                                                    |  | $                       | -      
|                                                                                                            |  |                         |        
|Supplemental
  disclosure of non-cash investing and financing     activities:                               |  |                         |        
|Issuance
  of restricted shares to lessor                                                                   |  | $                       | -      
|                                                                                                            |  |                         |        
|                                                                                                            |  |                         |        
|Exercise of a puttable warrant                                                                              |  | $                       | -      
|                                                                                                            |  |                         |        

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

F-8

---

---

|                                            
|--------------------------------------------
|CERAGON NETWORKS LTD.
  AND ITS SUBSIDIARIES
|                                            
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  
|                                            
|U.S. dollars in thousands                   

|NOTE 1:- | GENERAL                                                                                                                                                                                                                                                                                                                    
|-------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|         |                                                                                                                                                                                                                                                                                                                            
|         | Ceragon
  Networks Ltd. (the Company) is an Israeli corporation which is engaged in
  one business segment - developing, manufacturing and marketing high capacity
  broadband wireless network equipment.                                                                                                               
|         |                                                                                                                                                                                                                                                                                                                            
|         | The Company
  has eight wholly owned subsidiaries in the U.S., in the United Kingdom,
  France, Germany, Hong Kong, Mexico, India and Brazil. The subsidiaries
  provide marketing, distribution, sales and technical support to the Companys
  customers in Europe, Middle East, Africa, South America, Asia and the U.S.
|         |                                                                                                                                                                                                                                                                                                                            
|         | As to
  principal markets and major customers, see Note 12.                                                                                                                                                                                                                                                                
|         |                                                                                                                                                                                                                                                                                                                            
|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES                                                                                                                                                                                                                                                                                            
|         |                                                                                                                                                                                                                                                                                                                            
|         | The
  consolidated financial statements have been prepared according to United
  States generally accepted accounting principles (U.S. GAAP).                                                                                                                                                                            
|         |                                                                                                                                                                                                                                                                                                                            
|         | a.                                                                                                                                                                                                                                                                                                                         
|         |                                                                                                                                                                                                                                                                                                                            
|         |                                                                                                                                                                                                                                                                                                                            
|         |                                                                                                                                                                                                                                                                                                                            
|         | b.                                                                                                                                                                                                                                                                                                                         
|         |                                                                                                                                                                                                                                                                                                                            
|         |                                                                                                                                                                                                                                                                                                                            
|         |                                                                                                                                                                                                                                                                                                                            
|         |                                                                                                                                                                                                                                                                                                                            
|         |                                                                                                                                                                                                                                                                                                                            
|         | c.                                                                                                                                                                                                                                                                                                                         
|         |                                                                                                                                                                                                                                                                                                                            
|         |                                                                                                                                                                                                                                                                                                                            

F-9

---

---

|                                            
|--------------------------------------------
|CERAGON NETWORKS LTD.
  AND ITS SUBSIDIARIES
|                                            
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  
|                                            
|U.S. dollars in thousands                   

|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|-------- | ---------------------------------------
|         |                                        
|         | d.                                     
|         |                                        
|         |                                        
|         |                                        
|         | e.                                     
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         | f.                                     
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         | g.                                     
|         |                                        
|         |                                        

F-10

---

---

|                                            
|--------------------------------------------
|CERAGON NETWORKS LTD.
  AND ITS SUBSIDIARIES
|                                            
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  
|                                            
|U.S. dollars in thousands                   

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

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

| | i. | Impairment of Long-Lived Assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | The Companys long-lived assets are
  reviewed for impairment in accordance with Statement of Financial Accounting
  Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived
  Assets (SFAS No. 144), whenever events or changes in circumstances
  indicate that the carrying amount of an asset may not be recoverable.
  Recoverability of assets to be held and used is measured by a comparison of
  the carrying amount of an asset to the future undiscounted cash flows
  expected to be generated by the assets. If such assets are considered to be
  impaired, the impairment to be recognized is measured by the amount by which
  the carrying amount of the assets exceeds the fair value of the assets. As of
  December 31, 2003, no impairment losses have been identified.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | j. | Income taxes:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | The Company
  and its subsidiaries account for income taxes in accordance with Statement of
  Financial Accounting Standard No. 109, Accounting for Income Taxes (SFAS
  No. 109). This statement prescribes the use of the liability method whereby
  deferred tax asset and liability account balances are determined based on differences
  between financial reporting and tax bases of assets and liabilities and are
  measured using the enacted tax rates and laws that will be in effect when the
  differences are expected to reverse. The Company and its subsidiaries provide
  a valuation allowance, if necessary, to reduce deferred tax assets to their
  estimated realizable value.                                                                                                        

F-11

---

---

|                                            
|--------------------------------------------
|CERAGON NETWORKS LTD.
  AND ITS SUBSIDIARIES
|                                            
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  
|                                            
|U.S. dollars in thousands                   

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

F-12

---

---

|                                            
|--------------------------------------------
|CERAGON NETWORKS LTD.
  AND ITS SUBSIDIARIES
|                                            
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  
|                                            
|U.S. dollars in thousands                   

|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|-------- | ---------------------------------------
|         |                                        
|         | m.                                     
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         | n.                                     
|         |                                        
|         |                                        
|         |                                        
|         | o.                                     
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        

F-13

---

---

|                                            
|--------------------------------------------
|CERAGON NETWORKS LTD.
  AND ITS SUBSIDIARIES
|                                            
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  
|                                            
|U.S. dollars in thousands                   

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

| |                                                                                                              |  | Year ended
  December 31, |        
| | ------------------------------------------------------------------------------------------------------------ |  | ------------------------- | -------
| |                                                                                                              |  |                           |        
| |                                                                                                              |  | 2001                      |        
| |                                                                                                              |  |                           |        
| |                                                                                                              |  |                           |        
| | Net
  loss as reported                                                                                       |  | $                         | (56,843
| |                                                                                                              |  |                           |        
| | Add
  - stock based compensation expenses
       determined under APB 25                                     |  |                           | 6,431  
| | Deduct
  - stock-based compensation expenses
       determined under fair value method for all
       awards |  |                           | (12,293
| |                                                                                                              |  |                           |        
| |                                                                                                              |  |                           |        
| | Pro
  forma net loss                                                                                         |  | $                         | (62,705
| |                                                                                                              |  |                           |        
| |                                                                                                              |  |                           |        
| | Pro
  forma basic and diluted net loss per share                                                             |  | $                         | (2.97  
| |                                                                                                              |  |                           |        
| |                                                                                                              |  |                           |        
| | Basic
  and diluted loss per share, as reported                                                              |  | $                         | (2.69  
| |                                                                                                              |  |                           |        

F-14

---

---

|                                            
|--------------------------------------------
|CERAGON NETWORKS LTD.
  AND ITS SUBSIDIARIES
|                                            
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  
|                                            
|U.S. dollars in thousands                   

|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|-------- | ---------------------------------------
|         |                                        
|         |                                        
|         |                                        
|         | q.                                     
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         | r.                                     
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         | s.                                     
|         |                                        
|         |                                        

F-15

---

---

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

|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|-------- | ---------------------------------------
|         |                                        
|         | t.                                     
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         | u.                                     
|         |                                        
|         |                                        
|         |                                        
|         | v.                                     
|         |                                        
|         |                                        

F-16

---

---

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

|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)                     
|-------- | ------------------------------------------------------------
|         |                                                             
|         |                                                             
|         |                                                             
|NOTE 3:- | MARKETABLE SECURITIES                                       
|         |                                                             
|         | The
  following is a summary of held-to-maturity securities:

| |                                         |  | December
  31,   |       
| | --------------------------------------- |  | ---------------- | ------
| |                                         |  |                  |       
| |                                         |  | 2002             |       
| |                                         |  |                  |       
| |                                         |  | Amortized
  cost |       
| |                                         |  |                  |       
| | Held-to-maturity:                       |  |                  |       
| | U.S. Government and
     agencies debts |  | $                | 4,522 
| | Corporate debentures                    |  |                  | 13,777
| | Commercial papers                       |  |                  | 5,119 
| |                                         |  |                  |       
| |                                         |  |                  |       
| |                                         |  | $                | 23,418
| |                                         |  |                  |       

| | Aggregate maturities of held-to-maturity securities for years
  subsequent to December 31, 2003 are:
| | ----------------------------------------------------------------------------------------------------

| |                                           |  | Amortized
  cost |        | Estimated
  fair
  market value | 
| | ----------------------------------------- |  | ---------------- | ------ | ------------------------------- | 
| |                                           |  |                  |        |                                 | 
| | Held-to-maturity:                         |  |                  |        |                                 | 
| |                                           |  |                  |        |                                 | 
| | 2004
  (short-term marketable securities) |  | $                | 4,861  |                                 | 
| | 2005                                      |  |                  | 12,763 |                                 | 
| | 2006                                      |  |                  | 2,086  |                                 | 
| |                                           |  |                  |        |                                 | 
| |                                           |  |                  |        |                                 | 
| |                                           |  | $                | 19,710 |                                 | 
| |                                           |  |                  |        |                                 | 

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

F-17

---

---

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

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

| |                                                      |  | December
  31, |      
| | ---------------------------------------------------- |  | -------------- | -----
| |                                                      |  |                |      
| |                                                      |  | 2002           |      
| |                                                      |  |                |      
| |                                                      |  |                |      
| | Government
  authorities                             |  | $              | 586  
| | Prepaid
  expenses                                   |  |                | 369  
| | Other
  receivables related to sales of raw material |  |                | 88   
| | Others                                               |  |                | 225  
| |                                                      |  |                |      
| |                                                      |  |                |      
| |                                                      |  | $              | 1,268
| |                                                      |  |                |      

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

| |                                     |  | December 31, |      
| | ----------------------------------- |  | ------------ | -----
| |                                     |  |              |      
| |                                     |  | 2002         |      
| |                                     |  |              |      
| |                                     |  |              |      
| | Raw
  materials, parts and supplies |  | $            | 1,530
| | Work
  in progress                  |  |              | 3,655
| | Finished
  products                 |  |              | 2,869
| |                                     |  |              |      
| |                                     |  |              |      
| |                                     |  | $            | 8,054
| |                                     |  |              |      

|NOTE 6:- | PROPERTY AND EQUIPMENT                                                  
|-------- | ------------------------------------------------------------------------
|         |                                                                         
|         | Composition of assets grouped by major classifications are as
  follows:

| |                                                     |  | December 31, |      
| | --------------------------------------------------- |  | ------------ | -----
| |                                                     |  |              |      
| |                                                     |  | 2002         |      
| |                                                     |  |              |      
| | Cost:                                               |  |              |      
| | Computers,
  manufacturing and peripheral equipment |  | $            | 5,955
| | Office
  furniture and equipment                    |  |              | 1,887
| | Leasehold
  improvements                            |  |              | 528  
| |                                                     |  |              |      
| |                                                     |  |              |      
| |                                                     |  |              | 8,370
| |                                                     |  |              |      
| | Accumulated
  depreciation:                         |  |              |      
| | Computers,
  manufacturing and peripheral equipment |  |              | 3,579
| | Office
  furniture and equipment                    |  |              | 1,044
| | Leasehold
  improvements                            |  |              | 131  
| |                                                     |  |              |      
| |                                                     |  |              |      
| |                                                     |  |              | 4,754
| |                                                     |  |              |      
| |                                                     |  |              |      
| | Depreciated
  cost                                  |  | $            | 3,616
| |                                                     |  |              |      

| | Depreciation
  expenses for the years ended December 31, 2001, 2002 and 2003 were
  $ 2,015, $ 1,737 and $ 1,306, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                
| | As for
  pledges on assets, see Note 8d.                                                                                       

F-18

---

---

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

|NOTE 7:- | OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
|-------- | -------------------------------------------

| |                                  |  | December
  31, |      
| | -------------------------------- |  | -------------- | -----
| |                                  |  |                |      
| |                                  |  | 2002           |      
| |                                  |  |                |      
| |                                  |  |                |      
| | Employees
  and payroll accruals |  | $              | 1,363
| | Accrued
  non-recurring expenses |  |                | 1,261
| | Accrued
  expenses               |  |                | 964  
| | Provision
  for warranty costs   |  |                | 530  
| | Advances
  form customer         |  |                | -    
| | Other                            |  |                | 40   
| |                                  |  |                |      
| |                                  |  |                |      
| |                                  |  | $              | 4,158
| |                                  |  |                |      

|NOTE 8:- | COMMITMENTS AND CONTINGENT LIABILITIES
|-------- | --------------------------------------
|         |                                       
|         | a.                                    
|         |                                       
|         |                                       
|         |                                       
|         |                                       
|         |                                       
|         |                                       

F-19

---

---

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

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

| |                       |  | Year ended
  December 31, |      
| | --------------------- |  | ------------------------- | -----
| |                       |  |                           |      
| |                       |  | Facilities                |      
| |                       |  |                           |      
| |                       |  |                           |      
| | 2004                  |  | $                         | 946  
| | 2005                  |  |                           | 376  
| | 2006                  |  |                           | 63   
| | 2007                  |  |                           | 59   
| | 2008 and
  thereafter |  |                           | 424  
| |                       |  |                           |      
| |                       |  |                           |      
| |                       |  | $                         | 1,868
| |                       |  |                           |      

| |    | Facilities
  lease expenses for the years ended December 31, 2001, 2002 and 2003 were
  approximately $ 1,433, $ 1,323 and $ 963, respectively.                                                              
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                              
| |    | Vehicles
  lease expenses for the years ended December 31, 2001, 2002 and 2003 were
  approximately $ 560, $ 610 and $ 520, respectively.                                                                    
| |    |                                                                                                                                                                                                              
| | c. | Agreements
  with suppliers:                                                                                                                                                                                 
| |    |                                                                                                                                                                                                              
| |    | In 2001, the
  Company entered into agreements with two suppliers pursuant to which the
  Company was initially committed to purchase certain products from these
  suppliers.                               
| |    |                                                                                                                                                                                                              
| |    | In 2002, the
  Company entered into a supplementary arrangement with one of these suppliers
  in which all minimum purchase commitments of the prior agreement were
  mutually rescinded (see also Note 11a).

F-20

---

---

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

|NOTE 8:- | COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)                            
|-------- | --------------------------------------------------------------------------
|         |                                                                           
|         |                                                                           
|         |                                                                           
|         | d.                                                                        
|         |                                                                           
|         |                                                                           
|         |                                                                           
|         |                                                                           
|         |                                                                           
|NOTE 9:- | SHAREHOLDERS EQUITY                                                      
|         |                                                                           
|         | The Ordinary
  shares of the Company are traded on NASDAQ National Market.
|         |                                                                           
|         | a.                                                                        
|         |                                                                           
|         |                                                                           
|         |                                                                           
|         | b.                                                                        
|         |                                                                           
|         | 1.                                                                        
|         |                                                                           
|         |                                                                           
|         |                                                                           
|         | 2.                                                                        
|         |                                                                           
|         | 3.                                                                        

F-21

---

---

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

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

| |                                                                                                     |  | Year ended
  December 31, |           
| | --------------------------------------------------------------------------------------------------- |  | ------------------------- | ----------
| |                                                                                                     |  |                           |           
| |                                                                                                     |  | 2001                      |           
| |                                                                                                     |  |                           |           
| |                                                                                                     |  | Number
  of options       |           
| |                                                                                                     |  |                           |           
| | Outstanding
  at beginning of
       year                                                           |  |                           | 5,600,500 
| | Granted                                                                                             |  |                           | 2,355,900 
| | Exercised                                                                                           |  |                           | (1,647,675
| | Forfeited                                                                                           |  |                           | (579,871  
| |                                                                                                     |  |                           |           
| |                                                                                                     |  |                           |           
| | Outstanding
  at end of year                                                                        |  |                           | 5,728,854 
| |                                                                                                     |  |                           |           
| |                                                                                                     |  |                           |           
| | Options
  exercisable at end of
       year                                                         |  |                           | 1,389,949 
| |                                                                                                     |  |                           |           
| |                                                                                                     |  |                           |           
| | Weighted
  average fair value of
       options granted during the
       year, at their grant date |  |                           |           
| |                                                                                                     |  |                           |           

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

| | Range of
  exercise
  price |                 | Options
  outstanding
  as of
  December 31,
  2003 |  | Weighted
  average
  remaining
  contractual
  life (years) |  | Weighted
  average
  exercise
  price |      | Options
  exercisable
  as of
  December 31,
  2003 |  | Weighted
  average
  exercise
  price of
  options
  exercisable |  
| | --------------------------- | --------------- | --------------------------------------------------- |  | ----------------------------------------------------------- |  | ------------------------------------- | ---- | --------------------------------------------------- |  | ---------------------------------------------------------------- | -
| |                             |                 |                                                     |  |                                                             |  |                                       |      |                                                     |  |                                                                  |  
| |                             |                 |                                                     |  |                                                             |  |                                       |      |                                                     |  |                                                                  |  
| |                             | *)              |                                                     |  | 1,169,100                                                   |  |                                       | 5.70 |                                                     |  |                                                                  |  
| | $                           | 1.02
  - 1.50   |                                                     |  | 1,081,250                                                   |  |                                       | 8.67 |                                                     |  |                                                                  | $
| | $                           | 1.92
  -4.09    |                                                     |  | 3,311,271                                                   |  |                                       | 8.23 |                                                     |  |                                                                  | $
| | $                           | 4.50
  - 8.18   |                                                     |  | 382,250                                                     |  |                                       | 7.55 |                                                     |  |                                                                  | $
| | $                           | 11.00
  - 11.75 |                                                     |  | 421,500                                                     |  |                                       | 6.94 |                                                     |  |                                                                  | $
| | $                           | 12.94
  - 17.00 |                                                     |  | 116,750                                                     |  |                                       | 6.64 |                                                     |  |                                                                  | $
| |                             |                 |                                                     |  |                                                             |  |                                       |      |                                                     |  |                                                                  |  
| |                             |                 |                                                     |  |                                                             |  |                                       |      |                                                     |  |                                                                  |  
| |                             |                 |                                                     |  | 6,482,121                                                   |  |                                       | 7.72 |                                                     |  |                                                                  | $
| |                             |                 |                                                     |  |                                                             |  |                                       |      |                                                     |  |                                                                  |  
| | *) Lower
  than $ 0.01.     |                

| |  | Where the
  Company has recorded deferred stock compensation for options, which were
  granted before the Initial Public Offering in August 2000, with an exercise
  price below the fair market value of the Ordinary shares, the deferred stock
  compensation has been amortized and recorded as compensation expense ratably
  over the vesting period of the options. Compensation expenses of
  approximately $ 6,431, $ 2,974 and $ 1,354 were recognized
  during the years ended December 31, 2001, 2002 and 2003, respectively.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-22

---

---

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

|NOTE 9:- | SHAREHOLDERS EQUITY (Cont.)
|-------- | ----------------------------
|         |                             
|         | c.                          
|         |                             
|         |                             
|         |                             
|         |                             
|         |                             
|         |                             
|         |                             
|         | d.                          
|         |                             
|         |                             
|         |                             
|         | e.                          
|         |                             
|         |                             
|         |                             
|         |                             

F-23

---

---

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

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

| | f. | Warrants
to subcontractor:
| | -- | --------------------------

| | In
1998,   122,500 warrants were granted to a subcontractor for certain research and
  development services rendered. The warrants have an exercise price of less   than $
0.01 per share and expire in 2011. The fair value of the warrants at   the date of grant
was $ 227 and was charged to research and development   expense. During 2003, these
warrants were exercised.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|NOTE 10:- | TAXES ON INCOME                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|          | Tax benefits under the Law for the Encouragement of Capital Investments,
  1959:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|          | The
  Investment Center has granted the status of an Approved Enterprise under
  Israeli law to two investment programs at the Companys manufacturing
  facility in Tel-Aviv. Additionally, the Company has submitted a third program
  for the expansion of the same manufacturing facility.                                                                                                                                                                                                                                                                                                                                                     
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|          | The main
  benefit arising from such status is the reduction in tax rates on income
  derived from Approved Enterprises. Consequently, the Company is entitled to
  two years of tax exempt and five years of reduced tax rate (25%).
  Additionally, the Company is a foreign investors company, as defined by
  that law and as such, is entitled to additional reduction of tax to 10%-25%
  (based on the percentage of foreign ownership in each taxable year) and
  extension of three years of the benefit period. Since the Company has had no
  taxable income since inception, the benefits have not yet commenced for all
  programs.
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|          | The period
  of tax benefits, detailed above, is subject to limit of 12 years from the
  commencement of production, or 14 years from the approval date, whichever is
  earlier. Given the aforementioned conditions, under the first investment
  program, the period of benefits for the production facilities, which has not
  yet commenced, will terminate in the year 2011, and under the second
  investment program the period of benefits for the production facilities,
  which has not yet commenced, will terminate in the year 2013.                                                                                                    

F-24

---

---

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

|NOTE 10:- | TAXES ON INCOME (Cont.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|          | The
  entitlement to the above benefits is conditional upon the Companys
  fulfilling the conditions stipulated by the above law, regulations published
  thereunder and the instruments of approval for the specific investments in
  Approved Enterprises. In the event of failure to comply with these
  conditions, the benefits may be canceled and the Company may be required to
  refund the amount of the benefits, in whole or in part, including interest.
  As of December 31, 2003, management believes that the Company is meeting all
  of the aforementioned conditions.                                                                                                          
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|          | The
  tax-exempt income attributable to the Approved Enterprise can be
  distributed to shareholders without subjecting the Company to taxes only upon
  the complete liquidation of the Company. If these retained tax-exempt profits
  are distributed in a manner other than in the complete liquidation of the
  Company, they would be taxed at the corporate tax rate applicable to such
  profits as if the Company had not elected the alternative system of benefits,
  currently between 15%-20% for an Approved Enterprise. As of December 31,
  2003, the accumulated deficit of the Company does not include any tax-exempt
  profits earned by the Companys Approved Enterprise.
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|          | The Company
  expects that during the period these tax losses are utilized, its income
  would be substantially tax-exempt. Accordingly, there will be no tax benefit
  available from such losses and no deferred income taxes have been included in
  these consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                     
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|          | Income from
  sources other than the Approved Enterprise during the benefit period will
  be subject to tax at the regular corporate tax rate
  of 36%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|          | Tax benefits under the Law for the Encouragement of Industry (Taxes),
  1969:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|          | The Company
  and its Israeli subsidiary currently qualify as an industrial company under
  the above law and, as such, are entitled to certain tax benefits, mainly
  accelerated depreciation of machinery and equipment, and the right to claim
  public issuance expenses, as a deduction for tax purposes                                                                                                                                                                                                                                                                                                                                                                                     
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|          | Measurement of taxable income:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|          | Commencing
  with taxable year 2003, the Company has elected to measure its results for
  Israeli tax purposed on the basis of amounts denominated in US dollars. This
  election obligates the Company for three years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

F-25

---

---

|                                            
|--------------------------------------------
|CERAGON NETWORKS LTD.
  AND ITS SUBSIDIARIES
|                                            
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  
|                                            
|U.S. dollars in thousands                   

|NOTE 10:- | TAXES ON INCOME (Cont.)                                                                                                                                                                                                                                                                                                      
|--------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          |                                                                                                                                                                                                                                                                                                                              
|          | Israeli tax reform:                                                                                                                                                                                                                                                                                                          
|          |                                                                                                                                                                                                                                                                                                                              
|          | On July 24,
  2002, Amendment 132 to Israels Income Tax Ordinance (the Amendment) was
  approved by Israels parliament and came into effect on January 1, 2003. The
  principal objectives of the Amendment were to broaden the categories of
  taxable income and to reduce the tax rates imposed on employees income. 
|          |                                                                                                                                                                                                                                                                                                                              
|          | The material
  consequences of the Amendment applicable to the Company include, among other
  things, imposing a tax upon all income of Israel residents, individuals and
  corporations, regardless the territorial source of income and certain
  modifications in the qualified taxation tracks of employee stock options.
|          |                                                                                                                                                                                                                                                                                                                              
|          | Deferred income taxes:                                                                                                                                                                                                                                                                                                       
|          |                                                                                                                                                                                                                                                                                                                              
|          | Deferred
  income taxes reflect the net tax effects of temporary differences between the
  carrying amounts of assets and liabilities for financial reporting purposes
  and the amounts used for income tax purposes. Significant components of the
  Companys deferred tax assets are as follows:                         

| |                                                           |  | December
  31, |       
| | --------------------------------------------------------- |  | -------------- | ------
| |                                                           |  |                |       
| |                                                           |  | 2002           |       
| |                                                           |  |                |       
| | Deferred
  tax assets (liabilities):                      |  |                |       
| | U.S.
  net operating loss carryforward                    |  | $              | 1,942 
| | Reserve
  and allowances                                  |  |                | (26   
| |                                                           |  |                |       
| |                                                           |  |                |       
| | Total
  net deferred tax asset before valuation allowance |  |                | 1,916 
| | Valuation
  allowance                                     |  |                | (1,916
| |                                                           |  |                |       
| |                                                           |  |                |       
| | Net
  deferred tax asset                                  |  | $              | -     
| |                                                           |  |                |       

| | As of
  December 31, 2003, the Companys subsidiary has provided valuation allowances
  of approximately $ 2,239 in respect of deferred tax assets resulting
  from tax loss carryforwards and other temporary differences. The net change
  in the valuation allowance in the year 2003, amounted to $ 323.
  Management currently believes that since the Companys subsidiary has a
  history of losses it is more likely than not that the deferred tax regarding
  the loss carryforwards and other temporary differences will not be realized
  in the foreseeable future.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | Loss before taxes is comprised as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

| |          |  | Year ended December 31, |        
| | -------- |  | ----------------------- | -------
| |          |  |                         |        
| |          |  | 2001                    |        
| |          |  |                         |        
| |          |  |                         |        
| | Domestic |  | $                       | (48,514
| | Foreign  |  |                         | (8,329 
| |          |  |                         |        
| |          |  |                         |        
| |          |  | $                       | (56,843
| |          |  |                         |        

F-26

---

---

|                                            
|--------------------------------------------
|CERAGON NETWORKS LTD.
  AND ITS SUBSIDIARIES
|                                            
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  
|                                            
|U.S. dollars in thousands                   

|NOTE 10:- | TAXES ON INCOME (Cont.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|          | Net operating loss carryforwards:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|          | The Company
  has accumulated losses for Israel income tax purposes as of December 31,
  2003, in the amount of approximately $ 74,000. These losses may be
  carryforward and offset against taxable income in the future for an
  indefinite period.                                                                                                                                                                                                                                                                                              
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|          | As of
  December 31, 2003, Ceragon Inc. had U.S. federal net operating loss
  carryforwards of approximately $ 6,500, that can be carried forward and
  offset against taxable income and expire during the years 2019 to 2023.
  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.
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|NOTE 11:- | RESTRUCTURING AND NON-RECURRING EXPENSES (INCOME), NET                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|          | a.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

F-27

---

---

|                                            
|--------------------------------------------
|CERAGON NETWORKS LTD.
  AND ITS SUBSIDIARIES
|                                            
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  
|                                            
|U.S. dollars in thousands                   

|NOTE 11:- | RESTRUCTURING AND NON-RECURRING EXPENSES (INCOME), NET (Cont.)
|--------- | --------------------------------------------------------------
|          |                                                               
|          |                                                               
|          |                                                               
|          |                                                               
|          |                                                               
|          | b.                                                            
|          |                                                               
|          |                                                               
|          |                                                               
|          | c.                                                            

| |                                                                 |  | Year ended
  December 31, |      
| | --------------------------------------------------------------- |  | ------------------------- | -----
| |                                                                 |  |                           |      
| |                                                                 |  | 2001                      |      
| |                                                                 |  |                           |      
| |                                                                 |  |                           |      
| | Restructuring and Non-recurring expenses                        |  | $                         | 4,750
| | Non-recurring
  income                                          |  |                           | -    
| |                                                                 |  |                           |      
| |                                                                 |  |                           |      
| | Restructuring
  and Non-recurring expenses
       (income), net |  | $                         | 4,750
| |                                                                 |  |                           |      

|NOTE 12:- | MAJOR CUSTOMERS AND GEOGRAPHIC INFORMATION                                                                                                                                                                                                                                                                                                                                               
|--------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          |                                                                                                                                                                                                                                                                                                                                                                                          
|          | The Company
  adopted Statement of Financial Accounting Standard No. 131, Disclosures
  About Segments of an Enterprise and Related Information,(SFAS No. 131).
  The Company operates in one reportable segment (see Note 1 for a brief
  description of the Companys business). The total revenues are attributed to
  geographic areas based on the location of the end customer.

F-28

---

---

|                                            
|--------------------------------------------
|CERAGON NETWORKS LTD.
  AND ITS SUBSIDIARIES
|                                            
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  
|                                            
|U.S. dollars in thousands                   

|NOTE 12:- | MAJOR CUSTOMERS AND GEOGRAPHIC INFORMATION (Cont.)                                                                                                          
|--------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|          |                                                                                                                                                             
|          | The
  following presents total revenues for the years ended December 31, 2001, 2002
  and 2003 and long-lived assets as of December 31, 2001, 2002 and 2003:

| |                                                  |  | Year ended
  December 31, |       
| | ------------------------------------------------ |  | ------------------------- | ------
| |                                                  |  |                           |       
| |                                                  |  | 2001                      |       
| |                                                  |  |                           |       
| | Revenues
  from sales to unaffiliated customers: |  |                           |       
| |                                                  |  |                           |       
| | North
  America                                  |  | $                         | 9,519 
| | Europe,
  Middle East and Africa                 |  |                           | 13,169
| | Asia-Pacific
  and Latin America                 |  |                           | 2,164 
| |                                                  |  |                           |       
| |                                                  |  |                           |       
| |                                                  |  | $                         | 24,852
| |                                                  |  |                           |       
| | Long-lived
  assets, by geographic areas:        |  |                           |       
| |                                                  |  |                           |       
| | Israel                                           |  | $                         | 4,754 
| | United
  States                                  |  |                           | 95    
| | Other                                            |  |                           | 244   
| |                                                  |  |                           |       
| |                                                  |  |                           |       
| |                                                  |  | $                         | 5,093 
| |                                                  |  |                           |       

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

| |              |  | Year ended
  December 31, |     
| | ------------ |  | ------------------------- | ----
| |              |  |                           |     
| |              |  | 2001                      |     
| |              |  |                           |     
| |              |  | %                         |     
| |              |  |                           |     
| |              |  |                           |     
| | Customer
  A |  |                           | -   
| | Customer
  B |  |                           | *) -
| | Customer
  C |  |                           | -   
| | Customer
  D |  |                           | 30  
| | Customer
  E |  |                           | *) -
| | Customer
  F |  |                           | -   

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

F-29

---

---

|                                            
|--------------------------------------------
|CERAGON NETWORKS LTD.
  AND ITS SUBSIDIARIES
|                                            
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  
|                                            
|U.S. dollars in thousands                   

|NOTE 13:- | SELECTED STATEMENTS OF OPERATION DATA
|--------- | -------------------------------------
|          |                                      
|          | Financial
  income, net:             

| |                                                                       |  | Year ended
  December 31, |      
| | --------------------------------------------------------------------- |  | ------------------------- | -----
| |                                                                       |  |                           |      
| |                                                                       |  | 2001                      |      
| |                                                                       |  |                           |      
| |                                                                       |  |                           |      
| | Financial
  income:                                                   |  |                           |      
| | Interest
  on marketable securities                                   |  | $                         | 694  
| | Interest
  on bank deposits                                           |  |                           | 2,148
| | Foreign
  currency translation differences                            |  |                           | 178  
| | Other                                                                 |  |                           | -    
| |                                                                       |  |                           |      
| |                                                                       |  |                           |      
| |                                                                       |  |                           | 3,020
| |                                                                       |  |                           |      
| | Financial
  expenses:                                                 |  |                           |      
| | Interest
  in respect of bank credit and bank
            commissions |  |                           | 91   
| | Foreign
  currency translation differences                            |  |                           | 122  
| | Other                                                                 |  |                           | 38   
| |                                                                       |  |                           |      
| |                                                                       |  |                           |      
| |                                                                       |  |                           | 251  
| |                                                                       |  |                           |      
| |                                                                       |  |                           |      
| |                                                                       |  | $                         | 2,769
| |                                                                       |  |                           |      

|NOTE 14:- | RELATED PARTY BALANCES AND TRANSACTIONS                                                                                                                                                                                                                                                                                                                                                                                 
|--------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          |                                                                                                                                                                                                                                                                                                                                                                                                                         
|          | Most of the
  related party balances and transactions are with related companies and
  principal shareholders.                                                                                                                                                                                                                                                                                                          
|          |                                                                                                                                                                                                                                                                                                                                                                                                                         
|          | Yehuda
  Zisapel is a principal shareholder and Zohar Zisapel is a director and
  principal shareholder of the Company. They are brothers who, as of December
  31, 2002 and 2003, jointly own 25.3% and 24.5%, respectively of the Companys
  Ordinary shares. Jointly or severally, they are also founders, directors and
  principal shareholders of several other companies that are known as the
  RAD-BYNET group
|          |                                                                                                                                                                                                                                                                                                                                                                                                                         
|          | Members of
  the RAD-BYNET group provide the Company on an as-needed basis with finance,
  legal, management information systems, marketing, and administrative
  services, and the Company reimburse each company for its costs in providing
  these services. The aggregate amount of these expenses was approximately $
  175 and $ 170 in 2002 and 2003, respectively.                                              

F-30

---

---

|                                            
|--------------------------------------------
|CERAGON NETWORKS LTD.
  AND ITS SUBSIDIARIES
|                                            
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  
|                                            
|U.S. dollars in thousands                   

|NOTE 14:- | RELATED PARTY BALANCES AND TRANSACTIONS (Cont.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|          | The Company
  leases its office space for its current headquarters and principal
  administrative, finance, marketing and sales operations from real estate
  holding companies controlled by Yehuda and Zohar Zisapel. The lease for this
  facility will expire in May 2005. The Company also leases additional space in
  adjacent buildings from companies controlled by Zohar Zisapel and Yehuda
  Zisapel. Additionally, the Company leased the U.S. subsidiary office space
  from a real estate holding company controlled by Yehuda and Zohar Zisapel.
  The lease for this facility is valid until September 2008. The aggregate
  amount of rent and maintenance expenses related to these properties was
  approximately $ 1.1 million and $ 0.9 million in 2002 and 2003, respectively.
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|          | The Company
  purchases components from other members of the RAD-BYNET group that it
  integrates into its products. The aggregate purchase price of these
  components was approximately $ 300 thousand for the year ended December
  31, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|          | Transactions with related party:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

| |                                       |  | Year ended
  December 31, |      
| | ------------------------------------- |  | ------------------------- | -----
| |                                       |  |                           |      
| |                                       |  | 2001                      |      
| |                                       |  |                           |      
| |                                       |  |                           |      
| | Cost
  of sales                       |  | $                         | 1,564
| |                                       |  |                           |      
| |                                       |  |                           |      
| | Research
  and development expenses   |  | $                         | 822  
| |                                       |  |                           |      
| |                                       |  |                           |      
| | Selling
  and marketing expenses      |  | $                         | 394  
| |                                       |  |                           |      
| |                                       |  |                           |      
| | General
  and administrative expenses |  | $                         | 214  
| |                                       |  |                           |      
| |                                       |  |                           |      
| | Non-recurring                         |  | $                         | 47   
| |                                       |  |                           |      

| | Balances with related parties:
| | ------------------------------

| |                                                       |  | December
  31, |    
| | ----------------------------------------------------- |  | -------------- | ---
| |                                                       |  |                |    
| |                                                       |  | 2002           |    
| |                                                       |  |                |    
| |                                                       |  |                |    
| | Trade
  payables, other payables and accrued expenses |  | $              | 55 
| |                                                       |  |                |    
| |                                                       |  |                |    
| | Other
  receivables                                   |  | $              | 196
| |                                                       |  |                |    
| |                                                       |  |                |    
| | Trade
  receivables                                   |  | $              | -  
| |                                                       |  |                |    

- - - - - - - - - - - - - - - - - -
-

F-31



---

---

SIGNATURE

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

|CERAGON
  NETWORKS LTD.
|-----------------------
|                       
|By:                    
|                       
|Name:                  
|                       
|Title:                 
|                       
|                       
|Date:                  
|                       

67

---

---

CERTIFICATION

I, Shraga Katz, certify that:

| | 1. | I have
  reviewed this annual report on Form 20-F of Ceragon Networks Ltd.;                                                                                                                                                                                                                                                                  
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                              
| | 2. | Based on my knowledge,
  this report does not contain any untrue statement of a material fact
  necessary to make the statements made, in light of the circumstances under
  which such statements were made, not misleading with respect to the period
  covered by this report;                                                            
| |    |                                                                                                                                                                                                                                                                                                                                              
| | 3. | Based on my
  knowledge, the financial statements, and other financial information included
  in this report, fairly present in all material respects the financial
  condition, results of operations and cash flows of the company as of, and
  for, the periods presented in this report;                                                 
| |    |                                                                                                                                                                                                                                                                                                                                              
| | 4. | The
  companys other certifying officer and I are responsible for establishing and
  maintaining disclosure controls and procedures (as defined in the Exchange
  Act rules 13a-15(e) and 15d-15(e)) and internal control over financial
  reporting (as defined in Exchange Act Rules 13a-15(f) and 15-d-15(f)) for the
  company and have:
| |    |                                                                                                                                                                                                                                                                                                                                              
| |    | (a)                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                              
| |    | (b)                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                              
| |    | (c)                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                              
| |    | (d)                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                              

68

---

---

| | 5. | The
  companys other certifying officer and I have disclosed, based on our most recent
  evaluation of internal control over financial reporting, to the companys
  auditors and the audit committee of the companys board of directors:
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                            
| |    | (a)                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                            
| |    | (b)                                                                                                                                                                                                                                        

Date: June 30, 2004

|CERAGON NETWORKS LTD.                         
|----------------------------------------------
|                                              
|By: /s/                                       
|                                              
|                                              
|Name: Shraga
  Katz                           
|Title:
  President and Chief Executive Officer

69

---

---

CERTIFICATION

I, Ran Oz, certify that:

| | 1. | I have
  reviewed this annual report on Form 20-F of Ceragon Networks Ltd.;                                                                                                                                                                                                                                                                  
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                              
| | 2. | Based on my
  knowledge, this report does not contain any untrue statement of a material
  fact necessary to make the statements made, in light of the circumstances
  under which such statements were made, not misleading with respect to the
  period covered by this report;                                                            
| |    |                                                                                                                                                                                                                                                                                                                                              
| | 3. | Based on my
  knowledge, the financial statements, and other financial information included
  in this report, fairly present in all material respects the financial
  condition, results of operations and cash flows of the company as of, and
  for, the periods presented in this report;                                                 
| |    |                                                                                                                                                                                                                                                                                                                                              
| | 4. | The
  companys other certifying officer and I are responsible for establishing and
  maintaining disclosure controls and procedures (as defined in the Exchange
  Act rules 13a-15(e) and 15d-15(e)) and internal control over financial
  reporting (as defined in Exchange Act Rules 13a-15(f) and 15-d-15(f)) for the
  company and have:
| |    |                                                                                                                                                                                                                                                                                                                                              
| |    | (a)                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                              
| |    | (b)                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                              
| |    | (c)                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                              
| |    | (d)                                                                                                                                                                                                                                                                                                                                          

70

---

---

| |    |                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                               
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. | The
  companys other certifying officer and I have disclosed, based on our most
  recent evaluation of internal control over financial reporting, to the
  companys auditors and the audit committee of the companys board of
  directors:
| |    |                                                                                                                                                                                                                                              
| |    | (a)                                                                                                                                                                                                                                           | All
  significant deficiencies and material weaknesses in the design or operation
  of internal control over financial reporting which are reasonably likely to
  adversely affect the companys ability to record, process, summarize and report
  financial information; and
| |    |                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                               
| |    | (b)                                                                                                                                                                                                                                           | Any fraud,
  whether or not material, that involves management or other employees who have
  a significant role in the companys internal control over financial
  reporting.                                                                                                 
| |    |                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                               

Date: June 30, 2004

|CERAGON NETWORKS LTD.           
|--------------------------------
|                                
|By:                             
|                                
|                                
|Name: Ran Oz                    
|Title: Chief
  Financial Officer

71



---

---

EXHIBITS

|1.1  | Memorandum
  of Association (English translation accompanied by Hebrew original)*                                                                                
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                                                  
|1.2  | Articles
  of Association**                                                                                                                                      
|     |                                                                                                                                                                  
|4.1  | Tenancy
  Agreement, dated as of February 22, 2000, by and among Ceragon, Zisapel
  Properties Ltd. and Klil & Michael Properties Ltd. (English
  translation)***
|     |                                                                                                                                                                  
|8.1  | List
  of Subsidiaries                                                                                                                                           
|     |                                                                                                                                                                  
|10.1 | Consent
  of Independent Auditors                                                                                                                                
|     |                                                                                                                                                                  
|10.2 | Certification
  Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
  Sarbanes-Oxley Act of 2002                                       

|                                                                                                                                                                                                         
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*
  Previously filed as exhibit 3.1 in connection with the Ceragons Registration
  Statement on Form F-1 (Registration Statement 333-12312) on August 3, 2000
  and incorporated herein by reference.   
|                                                                                                                                                                                                         
|**
  Previously filed as exhibit 3.2 in connection with the Companys Registration
  Statement on Form F-1 (Registration Statement 333-12312) on August 3, 2000
  and incorporated herein by reference.  
|                                                                                                                                                                                                         
|***
  Previously filed as exhibit 10.3 in connection with the Companys
  Registration Statement on Form F-1 (Registration Statement 333-12312) on
  August 3, 2000 and incorporated herein by reference.

---

---

Exhibit 8.1

List of Subsidiaries

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

---

---

Exhibit 10.1

CONSENT OF INDEPENDENT AUDITORS

We hereby consent to the
incorporation by reference in the Registration Statements (Form S-8 No. 333-54356)
pertaining to the Key Employee share Incentive Plan and Affiliate Employees Option Plan of
Ceragon Networks Ltd. of our report dated January 29, 2004, with respect to the
consolidated financial statements of Ceragon Networks Ltd. Included in the Annual Report
(Form 20-F) for the year ended December 31, 2003.

|                   |                                    | 
|------------------ | ---------------------------------- | 
|                   |                                    | 
|Tel-Aviv,
  Israel | KOST, FORER GABBAY and KASIERER   
|June 29,
  2004    | A
  Member of Ernst & Young Global

---

---

Exhibit 10.2

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

In connection with the Annual Report of Ceragon
Networks Ltd., (the Company) on Form 20-F for the period ending December 31,
2003, as filed with the Securities and Exchange Commission on the date hereof
(the Report), the undersigned hereby certify that to the best of our
knowledge:

|1. | The
  Report fully complies with the requirements of Section 13(a) of the
  Securities Exchange Act of 1934; and                                        
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                         
|2. | The
  information contained in the Report fairly presents, in all material
  respects, the financial condition and results of operations of the Company.

|Date:
  June 30, 2004 |        | /s/                                     | SHRAGA
  KATZ | 
|--------------------- | ------ | --------------------------------------- | ------------- | 
|                      |        |                                         |              
|                      | Name:  | Shraga
  Katz                          
|                      | Title: | President
  and Chief Executive Officer
|                      |        |                                         |               | 
|Date:
  June 30, 2004 |        | /s/                                     | RAN
  OZ      | 
|                      |        |                                         |              
|                      | Name:  | Ran
  Oz                               
|                      | Title: | Chief Financial Officer                

---

---